President Obama’s historic Fed chief selection could also mean more history for investors.
Obama tabbed Janet Yellen as the first woman to be named chairperson in the 100-year history of the Federal Reserve. Stocks have rallied every day since she was appointed last Wednesday, with the S&P 500 moving up 3.3% in just three trading days.
Yellen’s reputation for being “dovish” has endeared her to the Wall Street mob. Few investors want to see QE3 come to an end anytime soon.
Since QE1 was implemented in November 2008, stocks have risen 64% in the 35 months that quantitative easing has been in place – an average annual gain of better than 21%. In the 22 months that quantitative easing hasn’t been in place, stocks have risen a mere 8.5%, or roughly 5% per year.
So the recent consternation about “tapering” – current Fed chief Ben Bernanke’s term for scaling back the Federal Reserve’s $85 billion-per-month bond buyback program – is understandable. But Yellen’s hiring seems to have assuaged some of those concerns.
Everything Yellen has said over the last few years indicates a strong preference for keeping interest rates low, and for maintaining federal stimulus measures until the unemployment rate drops significantly.
Here are three recent statements from Yellen that provide insight into her views:
January 2, 2011: “Is the program actually proving effective? My short answer is yes.”
April 11, 2012: “One approach I find helpful in judging an appropriate path for policy is based on optimal control techniques … This highly accommodative policy path generates … a notably faster reduction in unemployment than in the baseline outlook.”
March 2, 2013: “(On) the potential costs of the Federal Reserve’s asset purchases, there are some that definitely need to be monitored over time. At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program.”
The latter quote is perhaps most revealing. For starters, Yellen said it just seven and a half months ago. More importantly, the words “I do not see any that would cause me to advocate a curtailment of our purchase program” doesn’t leave much to interpretation.
Not much has changed with the economy since she uttered those words. The unemployment rate has declined only slightly from 7.6% to 7.3%. That’s not exactly the “notably faster reduction in unemployment” Yellen claimed to be looking for 18 months ago.
With the government shutdown entering its third week, the unemployment rate isn’t likely to dip much in the three and a half months until she supplants Bernanke on Feb. 1. And it seems unlikely that Yellen will suddenly do a 180 and immediately pull the plug on QE3 once she takes control of the central bank. Unless Bernanke makes it his mission to “taper” federal stimulus money during his last few months in office, Obama’s appointment of Yellen seems to signal that QE3 isn’t ending soon.
Meanwhile, interest rates should also remain low under Yellen. Bernanke has repeatedly stated his intention to keep interest rates near zero until at least 2015. That isn’t likely to change when Yellen takes office.
How does Yellen’s appointment affect income investors like you? Don’t change your strategy. Stick with what has been working the last couple years. That means owning blue-chip dividend stocks, high-yield stocks including MLPs and REITs, and dividend growers.
And Yellen’s hiring should cool off some of those taper fears. Absent an imminent end date, QE3 should continue to prop up stock prices.