Is the bond market any more confident about GDP? I am not sure how. The Bureau of Economic Analysis has shown that annual GDP dropped from 2.3% in 2012 to 2.2% in 2013. Even if the economy heats up to register consecutive quarters of 3% growth in the 2nd half of 2014 – an unlikely prospect at best – the trend will still have decelerated down to 2% for calendar year 2014. Keep in mind that 2012-2014 make up the three-year period of ”shock-and-awe” level electronic dollar creation by the Fed. So what happens without QE3? What happens without zero percent overnight lending rate policy? Nobody knows, but the bond market is certainly worried.
None of the aforementioned thoughts suggest that stocks are doomed. We just have to come to grips with the reality that risk assets are entirely dependent on investor perception of central bank accommodation. European stocks had been languishing for months, as investors wondered if the bad batch of recessionary data points would be enough for Mario Draghi and the European Central Bank (ECB) to provide additional stimulus. His comments in Jackson Hole, Wyoming suggest that the ECB will step up its game; foreign developed stocks in funds like iShares MSCI EAFE (EFA) are now back in play.
U.S. stocks? They may pull back, sell off, correct and consolidate. Nevertheless, as long as investors recognize that employment data are dicey (e.g., absence of wage inflation, low level of labor force participation, etc.), they’re willing to stay with U.S. equities. After all, Fed chairperson Janet Yellen fears moving away from zero percent rate policy too soon more than she fears being “behind the curve.” If you are adding to U.S. stocks, I advise steering clear of the smallest companies and incrementally purchasing the largest and least volatile ones. Consider iShares USA Minimum Volatility (USMV) and iShares S&P 100 (OEF).