The Fed's Running the Show and Risk Keeps Going Up

By Mitchell Clark, B.Comm. for Profit Confidential

There just isn’t enough real economic growth out there for a rising stock market—at least not much more than has already been achieved. News from the Federal Reserve of the central bank considering how to end quantitative easing sent the stock market much lower, revealing just how artificial the whole system is.

I actually think the current stock market is fairly valued, but it shouldn’t be going up in value with modest revenues and earnings growth. The Federal Reserve is the catalyst for today’s trading action, but first-quarter earnings season will be a catalyst for investor sentiment. Some companies and industries are doing better than others. The choppy recovery in the U.S. economy is now being reflected in earnings results, as corporations can no longer cut any more costs. Revenue growth is now the key.

On the release of the minutes from the Federal Reserve meeting, stock markets around the world sold off, literally. All the positive action so far this year has been incredibly tenuous, and the low trading volume said it all. I think we’re now in a mini-correction, induced by recent news from the Federal Reserve, although it won’t be a market-breaking pullback.

Right now, the prospects for gold, silver, and oil are terrible, and the near-term action in resource stocks is headed downward. We also have a lot of solid, dividend paying large-caps that are trading right near their highs and are due for a break.

It’s odd that the stock market reacted so negatively to the Federal Reserve’s latest news. Investors have been complaining about all the easy money and artificially low interest rates. The predictability of the stock market’s reaction to the Federal Reserve is telling of the herd mentality of the system. Wall Street really is just a big game.

The stock market is going to be convulsing near term, and the key for investors will be to keep focusing on what corporations are saying about their businesses. Wal-Mart Stores, Inc. (NYSE/WMT) reduced its first-quarter guidance just slightly because of higher gas prices and increased payroll taxes, but its fourth-quarter earnings beat consensus. The company also announced an 18% increase to its quarterly dividend, which is always welcome news. (See “Show Me the Money? Just Ask Costco.”)

Federal Reserve monetary policy is responsible for the stock market action since the financial crisis and recession of 2008/2009. Corporations and the economy have been responsible for the slow growth in revenues and earnings since then, and the stock market is appropriately valued. Therefore, the near-term fundamentals haven’t really changed.

We have seen continued recovery in the U.S. housing market and even in employment (especially employment in the private sector). The industrial economy reported continued strength in the fourth quarter of 2012, and the technology sector is holding its own. All in all, the stock market is where it should be, and economic growth will be low and slow for the near future.

It’s going to be another wacky year for stocks, thanks to the Federal Reserve. Anything is possible these days, which is why it pays to be conservative with your holdings. For me, dividend paying blue chips continue to be the only stocks to own. Everything else really is a gamble.