Stocks started the year in a good mood and have been shaking off any worries since. Even fears about the government going off the fiscal cliff—we didn’t at the very last moment—running up against the debt limit (February or early March), sequestration spending cuts (March 1) and running out of money to operate the nation (March 27) haven’t pushed stocks off their perch.
The primary reason behind that resilience is the Fed, he says.
“Every time the Fed does a quantitative easing they trial balloon it through the Wall Street Journal and every time that they’ve done that the market has moved appreciably higher,” Ritholtz tells The Daily Ticker.
The S&P 500 (^GSPC) is up 3.2% year-to-date.
While dependence on the Fed may be helping stocks now, it creates vulnerability for their future.“The wild card is how much can the Fed compensate for a universe of ills,” says Ritholtz.
At its last policymaking meeting in mid-December the Fed said it would maintain near-zero interest rates for as long as the unemployment rate remains above 6.5%, the inflation outlook for the next one or two years doesn’t top 2.5% and longer-term inflation expectations continue to be “well-anchored.”
The Fed also announced its fourth round of quantitative easing, adding $45 billion worth of long-term Treasury purchases to the $40 billion of mortgage securities it already buys on a monthly basis.
Fed easing “has moved markets upwards, made cash worth less and made bonds not a place you want to be,” says Ritholtz.
He advises long-term investors to hold a balanced portfolio 60/40 or 70/30 stocks to bonds, and he favors emerging markets (EEM), dividend-paying stocks (SDY), small-(^RUT) and mid-caps (IJH) and technology excluding Apple (AAPL).
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