The Fed turns a page, we remain focused on growth

[ad_1]
<div _ngcontent-c14 = "" innerhtml = "

No increase for federal funds in 2019 and no more bond sales after September: this is the latest monetary policy directive of the US Federal Reserve. It ends the tightening cycle that saw the first rate hike in December 2015 but actually started in May 2013, when the then chairman, Ben Bernanke, ended "Quantitative Easing."

QE was the Fed's policy of buying bonds to lower market interest rates. And at the height of the financial crisis after 2008, the central bank had a balance sheet of $ 4,500 billion. The plan now is to reduce that amount to $ 3.5 trillion by the end of September and then maintain it while refinancing maturing mortgage-backed securities with US Treasury securities.

The total increase in Fed Funds was 2.25 percentage points. This compares to 4.25 points for June 2004-2006 and is the lowest for a tightening cycle in the post – Second World War era. It is also by far the longest tightening period, from the reversal of QE.

President Jerome Powell has called this decision to align the policy with the Fed's 2% annualized inflation target. But the change will leave balance sheet obligations at 17% of US GDP, compared with just 6% in June 2006 at the end of the previous tightening cycle. This raises questions about the central bank's ability to combat a real economic downturn.

Fortunately, only two of the 10 factors in our forecasting model point to a recession in 2019. One of them, the US Federal Reserve's policy, will reverse shortly, unless the bank Central does not change course.

In the absence of a recession, the bull market will not end any time soon. And investors will be better advised to use the troughs to create positions in strong companies, rather than running towards the hills.

Those who enjoyed the lows of the December holiday season are already much richer. The S & P 500 is still about three percentage points below its peak in late September 2018, but is up 24% from its lows.

Concerns about global growth triggered this sale. New evidence that the slowdown, even in China, will not be as severe as feared has inspired the recovery, as well as the generally strong results of the fourth quarter of 2018.

The news of the Fed this week have obviously stimulated purchases. And we see many potential catalysts for more gains later in the summer. These include a possible trade deal between the United States and China, a scramble in Brexit and another solid earnings release season that starts in less than a month.

But as long as our forecast model does not say a recession, we will focus on the health and growth of the companies' underlying businesses, whether they pay dividends or not.

It is generally accepted that sectors such as utilities and REITs are substitutes for bonds. And by this reasoning they should in particular benefit from the end of this tightening cycle.

I will accept that under a very important aspect. Primarily, these sectors are the main sellers of bonds, both to finance new capital expenditure and to refinance existing debt. The Fed's announcement this week raised the yield on 10-year Treasuries to its lowest level since early 2018.

Given that bonds issued by utilities, REITs and other dividend payers are compared to Treasurys, this represents a major opportunity for companies to issue bonds at lower rates, thus reducing the cost of interest and hence the benefits.

There is potentially an even greater opportunity for the handful of mid-tier companies in the premium energy sector, such as Business Products Partners (EPD) and

Kinder Morgan
Inc. (KMI) to do the same thing. But it is unlikely to apply to borrowers rated below investment grade. In fact, the situation could become more difficult if investors saw the Fed's policy change as a tacit warning of an impending recession.

However, what is patently false is the persistent popular narrative that dividend-paying stock prices always follow interest rates and the Fed's policy up and down. The Dow Jones Utility Average, for example, has traded around 550 when the Fed Funds rose for the first time in December 2015. Just before the announcement of the zero increase this week, it has reached a new absolute record, around 780. The DJUA has further improved from June 2004 to June 2006, with a return of nearly 60%.

During both tightening cycles, utilities benefited from a stronger economy, along with the rest of the stock market, to which the Fed responded by raising rates. And profits and growth will continue to guide their evolution, even with the Fed's decision.

The considerable influence of the Fed on the economy means that it can certainly affect these factors. And all things being equal, what she announced this week is bullish for stocks and bonds. But make no mistake: there is no decisive link between Fed policy and investor returns from dividend-paying stocks.

Need more evidence? The DJUA managed total double-digit returns in 2009 and 2013, the two years the Fed raised rates and the 10-year Treasury yield rose more than 70%. Conversely, even with dividends, utilities were nearly 30% submerged in 2008, a year of frenzied Fed rate cuts and halving benchmark rates.

In the end, dividend stocks behave like other stocks. They are not bond followers or bond alternatives Returns follow the health and business growth outlook, whether the Fed raises rates or lowers them. That's what to focus on, more than ever.

">

No increase for federal funds in 2019 and no more bond sales after September: this is the latest monetary policy directive of the US Federal Reserve. It puts an end to the tightening cycle that saw the first rate hike in December 2015 but actually started in May 2013, when then President Ben Bernanke ended Quantitative Easing.

QE was the Fed's policy of buying bonds to lower market interest rates. And at the height of the financial crisis after 2008, the central bank had a balance sheet of $ 4,500 billion. The plan now is to reduce that amount to $ 3.5 trillion by the end of September and then maintain it while refinancing maturing mortgage-backed securities with US Treasury securities.

The total increase in Fed Funds was 2.25 percentage points. This compares to 4.25 points for June 2004-2006 and is the lowest for a tightening cycle in the post – Second World War era. It is also by far the longest tightening period, from the reversal of QE.

President Jerome Powell has called this decision to align the policy with the Fed's 2% annualized inflation target. But the change will leave balance sheet obligations at 17% of US GDP, compared with just 6% in June 2006 at the end of the previous tightening cycle. This raises questions about the central bank's ability to combat a real economic downturn.

Fortunately, only two of the 10 factors in our forecasting model point to a recession in 2019. One of them, the US Federal Reserve's policy, will reverse shortly, unless the bank Central does not change course.

In the absence of a recession, the bull market will not end any time soon. And investors will be better advised to use the troughs to create positions in strong companies, rather than running towards the hills.

Those who enjoyed the lows of the December holiday season are already much richer. The S & P 500 is still down about three percentage points at its peak in September 2018, but it has risen 24% from its lows.

Concerns about global growth triggered this sale. New evidence that the slowdown, even in China, will not be as severe as feared has inspired the recovery, as well as the generally strong results of the fourth quarter of 2018.

The news of the Fed this week have obviously stimulated purchases. And we see many potential catalysts for more gains later in the summer. These include a possible trade deal between the United States and China, a scramble in Brexit and another solid earnings release season that starts in less than a month.

But as long as our forecast model does not say a recession, we will focus on the health and growth of the companies' underlying businesses, whether they pay dividends or not.

It is generally accepted that sectors such as utilities and REITs are substitutes for bonds. And by this reasoning they should in particular benefit from the end of this tightening cycle.

I will accept that under a very important aspect. Primarily, these sectors are the main sellers of bonds, both to finance new capital expenditure and to refinance existing debt. The Fed's announcement this week raised the yield on 10-year Treasuries to its lowest level since early 2018.

Given that bonds issued by utilities, REITs and other dividend payers are compared to Treasurys, this represents a major opportunity for companies to issue bonds at lower rates, thus reducing the cost of interest and hence the benefits.

There is potentially an even greater opportunity for the handful of mid-tier companies in the premium energy sector, such as Business Products Partners (EPD) and

Kinder Morgan
Inc. (KMI) to do the same thing. But it is unlikely to apply to borrowers rated below investment grade. In fact, the situation could become more difficult if investors saw the Fed's policy change as a tacit warning of an impending recession.

However, what is patently false is the persistent popular narrative that dividend-paying stock prices always follow interest rates and the Fed's policy up and down. The Dow Jones Utility Average, for example, has traded around 550 when the Fed Funds rose for the first time in December 2015. Just before the announcement of the zero increase this week, it has reached a new absolute record, around 780. The DJUA has further improved from June 2004 to June 2006, with a return of nearly 60%.

During both tightening cycles, utilities benefited from a stronger economy, along with the rest of the stock market, to which the Fed responded by raising rates. And profits and growth will continue to guide their evolution, even with the Fed's decision.

The considerable influence of the Fed on the economy means that it can certainly affect these factors. And all things being equal, what she announced this week is bullish for stocks and bonds. But make no mistake: there is no decisive link between Fed policy and investor returns from dividend-paying stocks.

Need more evidence? The DJUA managed total double-digit returns in 2009 and 2013, the two years the Fed raised rates and the 10-year Treasury yield rose more than 70%. Conversely, even with dividends, utilities were nearly 30% submerged in 2008, a year of frenzied Fed rate cuts and halving benchmark rates.

In the end, dividend stocks behave like other stocks. They are not bond followers or bond alternatives Returns follow the health and business growth outlook, whether the Fed raises rates or lowers them. That's what to focus on, more than ever.