Telemus Capital Fed Taper Market Commentary

In our last commentary we suggested the recent bipartisan budget agreement may not be good for stocks in the near term and bonds in the near or longer term due to the fact the agreement likely paved the way for the Fed to begin tapering its bond buying activities. So far it looks like we were only half right. Yesterday the Fed announced the beginning of its tapering plan. The announcement was a bit of a surprise for the market (most expected tapering to begin after the first FOMC meeting in 2014); but, while it was more than expected it was probably less than many feared the first round of tapering would be. Most importantly, the announcement was accompanied by the Fed’s own forecast for the economy, employment and inflation. Based on the Fed’s forecast investors can expect short-term interest rates to be anchored near zero percent through the end of 2016 and possibly beyond. The stock market rallied nearly 2% on the news; but, intermediate term interest rates increased roughly 0.10% (i.e. intermediate bond prices declined approximately 0.5%).

While we were a little surprised with the Fed’s forecast, particularly the part where they don’t see core inflation exceeding 1.75% (their minimum target is 2%) at any time in the next three years, we weren’t totally caught off guard with the likelihood of short-term interest rates remaining anchored near zero percent for the foreseeable future. Bond yields increasing was expected; but, as we mentioned in last week’s commentary, we also expected the first announcement of Fed tapering to lead to the long anticipated correction in the stock market. We obviously got that one wrong—at least for a day. The last two times the Fed ended its bond buying activities (QE I and QE II) the stock market proceeded to decline 10%-15% in the following months. We still think that is more likely to happen than not but it may get postponed until the new year.

Other than a much needed and somewhat overdue correction, we believe in the intermediate- and longer-term that stocks offer far greater value to investors than bonds. The Fed forecast described an environment in which short-term interest rates remained at zero percent, inflation was virtually non-existent (below the Fed’s minimum target rate), the employment market was steadily improving and the economy continued to advance—that’s nirvana for stock investors. As we said before, we believe there is at least one more big move left in this stock market rally—any corporate top line growth (sales/revenues) will likely be accompanied by the expansion of price-to-earnings multiples. The S&P 500 currently has a price-to-estimated earnings multiple of 16.3x—a one multiple increase (to 17.3x), all other things being equal, would be worth 6% in total returns for stock market investors. It is not uncommon for price-to-earnings ratios to expand several multiples in the late stages of a bull market.

What to do if you win the Mega Millions

Lyle Wolberg on WWJ giving his advice on what to do if you happen to win the Mega Millions Jackpot.

Telemus Capital December Market Commentary

Yesterday the US House of Representatives passed a bipartisan budget deal—the first one we’ve had in four years—and the Senate is expected to pass it early next week.  It’s been a long time coming but it looks like Washington might finally be getting out of the way.  This is great news for the economy, consumer sentiment and the overall employment outlook.  Unfortunately, it probably isn’t great news, at least in the near term, for investors.  The markets have been keenly attuned to the Federal Reserve’s policies.  As long as Washington remained dysfunctional the Fed felt the need to maintain its quantitative easing (buying Treasury and mortgage bonds in the open market) policy.  The passage of this budget deal gives Washington the appearance, if only temporarily, of being functional.  This action, coupled with a generally improving economic environment, should pave the way for the Fed to begin tapering down its bond buying activities early next year.


This past May, when the Fed first mentioned the idea of tapering QE, the stock market proceeded to decline 5% over the next month.  The end to QE 1 and QE 2 saw declines of 10%-15% in the stock market.  The market is down 2% since the announcement of the bipartisan budget deal.  Considering it was up, mostly uninterrupted, 30% over the previous 12 months and 50% over the previous two years—it isn’t a stretch to suggest this market might be ready for a little breather.  It wouldn’t surprise us to see a 10%-15% correction sometime in the next few months.  We believe that correction will make for an attractive buying opportunity as the market enters the next phase of this bull market that began in 2009.  Corporations have done an excellent job of growing their earnings in a mostly benign revenue growth environment.  In this next phase of the bull market we would expect to see improving revenue growth along with continued earnings gains and price-to-earnings multiple expansion.  That would be a very powerful move for stocks and could ultimately propel the S&P above 2000 (currently at 1775) in the coming year.


The near term and long term prospects for taxable bonds are probably both negative should the Fed taper its bond buying activity.  The 10-year US Treasury is creeping up on 3% again (currently at 2.86%)—the peak it hit in early September.  We don’t think it will stop there—yields will likely hit 3.5% and possibly even 4% in the coming year as the economy continued to improve and the fear of deflation is replaced with a fear of inflation.  A 1% rise in interest rates would cause a 3%-3.5% decline in the prices of an intermediate bond portfolio.  We believe even the most conservative investors may be better served investing in equity income (REITs, Infrastructure, Utilities, BDCs, etc.) and/or alternative income strategies.