John Manley

All good things must end

AdvantageVoice® Blog—2-25-13
John Manley, CFA, Chief Equity Strategist

It’s true that all good things must end, but I suppose all bad things must end too. A number of investors have focused on the first statement recently and ignored the second. I sense that, while bulls and bears debate the long-term outlook for equities, there is a widespread queasiness about the market’s inexorable advance this year that has produced a good amount of concern about the near future. A lot of people are looking for a stock market pullback to add to their long positions or trim the losses on their shorts.

It’s not like there’s nothing to worry about. The sequester is only days away, and Congress and the President both seem to be intransigent. The Republicans, yet again, may take the blame for this, but they got little from the fiscal cliff deal and may take a harder line here. (As an aside, I must say that that is not entirely true. I believe that keeping both the dividend and long-term capital gains tax rates below 25% was a victory for capital formation and all investors. It is a tax increase, but, at least, it is not confiscatory. Innovators and risk takers can still hope to get rich in America.)

We all see the sequester coming and most of us wonder why the markets are not cringing a bit more. I think that a government shutdown would put equities in retrenchment mode, but, given the highly visible nature of the process, I suspect that the pullback would be sharp and short.

Another concern arose recently with the release of the latest minutes of the Federal Open Market Committee. I would refer the reader to Dr. Brian Jacobsen’s excellent article on this issue. I would add that the pullback seems unjustified given what I believe to be the true nature of positive monetary pressure.

While quantitative easing may be an extreme example of Federal Reserve accommodation, its demise, whenever it comes, should neither mark the end of that accommodation nor the end of positive monetary pressure. I believe that it is the presence of that easy money that has pushed up markets both in the recent past and over the last 65 years.

Simply put, when the Federal Reserve pushes money towards the economy to stimulate it, that money flows through the equity market and tends to push it higher unless equities are extremely highly valued (as they were in 2000) or the financial sector breaks down (as it did in 2007-2008). Otherwise stocks tend to be buoyant, as they have been in the last six weeks. When signs of economic resurrection also are present (as I believe they are now) the effect can be especially potent.

Like most of us, I sense that the next several weeks may not be as unremittingly positive as the last month and a half. Nothing goes on forever. However, this possibility pales in comparison to the longer-term potential created by positive monetary pressure, improving fundamentals, and what may be early signs of renewed interest in equities by individual investors.

The views expressed are as of 2-25-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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