Whoa! Everyone take a deep breath. The fact that the Fed is thinking about tapering bond purchases is a good thing, not a bad thing! The negative market reaction is unwarranted and those with eyes to see should view any sell-off due to tapering fears as a great buying opportunity. Here are three simple reasons why:
1.) The economy continues to improve:
It's a Plow Horse economy. It continues to push forward despite the headwinds it faces; mainly in the form of big government and bad policy. And some evidence suggests the Plow Horse is picking up its gait.
In data released today, initial jobless claims for last week fell 23,000 to 340,000, while continuing claims fell below 3 million for the first time in 5 years (down 112,000 to 2.91 million). Add to this good housing data. Today, it was reported that new home sales rose 2.4% in April and are now up a whopping 29% from a year ago. The sales pace is at the second highest level since mid-2008 and median prices are up 14.9% from a year ago. Yesterday, April existing home sales were also reported as rising. Other housing news showed that the FHFA index, which measures prices for homes financed by conforming mortgages, increased 1.3% in March (seasonally-adjusted) and is up 7.2% from a year ago.
2.) QE is significantly less important than conventional wisdom believes:
The monetary base has expanded at a 25% annualized rate since QE began in late 2008 – from $840 billion in September 2008 to $2.97 trillion now. But, the M2 measure of the money supply remains stuck at a 6% annualized growth pace during the same period. In other words, high-powered Fed money creation is not boosting M2, but instead is boosting excess bank reserves. QE is not boosting stocks or the economy; rather it is boosting excess reserves, which is not lifting stock prices.
3.) Stocks are up because corporate profits are up.
Corporate profits are easily keeping up with stock prices. We are still awaiting Q1 2013 corporate profit data, which we will get our first look at next Thursday. But, from Q4 2008 through Q4 2012 corporate profits were up 107% while the total return for the S&P 500 with dividends reinvested from 12/31/2008 to 12/31/2012 was 72%. We do have the S&P 500 price/operating earnings ratio through Q1 2013. This stood at 15.92 in Q1 2013 compared to 18.24 in Q4 of 2008, showing that prices have not kept up with earnings.
Bottom line: The market is still substantially undervalued. The fact that the Fed is considering tapering is a good thing; do not let short term traders and the pessimistic media fool you.
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Posted on Thursday, May 23, 2013 @ 3:20 PM
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