The S&P 500 (GSPC) hit another record high last Friday, closing at 1759.77 and capping a 23% year-to-date gain. Early Monday the S&P 500 was trading about 2 points above Friday's close. Relatively strong earnings and expectations that the Fed will continue its monthly bond purchases and zero interest rate policy have helped push stock prices higher.
David Kotok, co-founder and chief investment officer of Cumberland Advisors, had been expecting further gains in stocks, but now he tells The Daily Ticker that the market and the economy are vulnerable because of one man -- Senator Rand Paul.
"As part of Senate consideration of the Janet Yellen nomination to be Chair of the Federal Reserve, I will request a vote on my bipartisan Federal Reserve Transparency Act, S. 209. The American people deserve transparency from the federal reserve and the federal government as a whole.”
Senator Paul's move "threatens the recovery in the economy," says Kotok. "It introduces another uncertainty about Fed policy. It alters the view of a smooth transition in the leadership of the central bank."
The Fed has been a key reason stocks have rallied as much as they have, according to most analysts. The low rates orchestrated by Fed policy have made stocks more attractive than bonds, lowered borrowing costs for businesses and individuals and helped stabilize the economy. But the Fed's asset purchases -- now $85 billion worth of Treasuries and mortgage securities every month --have swelled its balance sheet to $3.8 trillion.
"If left alone, the Fed will resolve its policy," says Kotok. "Now we have to contend with another political issue that makes no logical sense. This is not about Janet Yellen so why have it interfere?"
Fed policy makers will meet this Tuesday and Wednesday to discuss when the central bank should begin to taper its asset purchases. Markets were expecting the Fed would announce a taper start date at its last meeting in September.
Kotok says the U.S. economy is still weak as shown by the latest durable goods report (up 3.7% primarily due to aircraft orders) and GDP report (2.5% annualized growth for the second quarter) so more uncertainty could derail the fragile recovery. On the other hand, "If investors believe we're going to have gradual economic recovery, low inflation, low interest rates and work our way very slowly out of this extraordinary position of our central bank.... then they can depend on rising asset prices," he argues. "Real estate can recover, stocks can recover, inflation will remain low."
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