Fed Policies Will Hold the Economy DownA lot of people feel the Federal Reserve’s policies will result in a major stock market collapse, which is a very real possibility. What we know is that the current cycle is actually favorable for the stock market and corporations in terms of low interest rates and a growing money supply; but real economic growth is still a very tough thing to come by in the U.S. economy.
In these pages over the last few months, we’ve been looking at a lot of successful corporations—corporations that don’t require monetary stimulus from the Fed. (See “A Top Stock with Increasing Dividends and Record Profits.”) But realistically, this doesn’t tell the whole story. The business cycle exists for most companies, and without question, it certainly does exist for Main Street.
The economic times we’re experiencing now aren’t that different than they were in the 80s. Unemployment was lower then, as U.S. government spending and borrowing accelerated tremendously and the trade deficit was out of control. The stock market went up a lot, crashed, recovered quickly, and then accelerated again. There was the savings and loan crisis and another recession, but the economy got through it and it was boom times after that. Then the cycle happened again—twice.
These events are a fact of life in business and for the stock market. Times change, but not the business cycle. All these events are beyond your control as an individual investor; therefore, the only thing that matters is how you structure your portfolio to deal with them. There is always a lot of noise in the marketplace—noise from politicians, the stock market, corporations, and the media. And all of it distracts you from the most important aspect of the whole game—how corporations are performing and how your portfolio is structured to deal with the risk.
The financial health of many corporations is a lot different than the U.S. economy on the whole. If you think of corporations as their own entity, their own participants in the marketplace, basically they are cash-rich and not spending. This is helpful for investors, but not Main Street.
I read some poor earnings results recently, but for the most part, corporations are reporting either steady business conditions or modest growth. The stock market is performing exceedingly well, all things considered, and it isn’t just because of the third round of quantitative easing (QE3). The best corporations are growing their businesses, regardless of sovereign debt, interest rates, or the Fed, but the number of companies able to do this is quite small.
The Federal Reserve is doing what it does best, and that’s printing money. Instead of trying to keep a lid on inflation, it’s doing the opposite now. This cycle is eventually going to change, and when it does, the stock market will suffer. But near-term, the biggest player in the U.S. economy is actually government spending, which we know is under pressure.
So, the very policies being used to re-inflate the U.S. economy and the stock market will be responsible for holding it back. That’s why dividend income is so absolutely critical to your stock market investments. It’s the only thing you can count on, likely for the rest of this decade.
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