Investors Watch as Federal Reserve's Mood May Be Changing

May 14, 2013 by Thomas F. Burke, P.C.

The Federal Reserve's QE Infinity program may be finite rather than "infinite" after all. QE Infinity has been the tongue-in-cheek term given the Fed's Quantitative Easing program, which has expanded into their purchasing $85 billion per month in mortgage-backed securities and Treasuries. But the winds of change may be blowing. Investors have been abuzz as the Wall Street Journal recently reported that officials at the central bank are considering an exit strategy from the massive stimulus measures that have been driving the U.S. economy for nearly the last five years.


A senior interest rate strategist at Columbia Management said "Faced with conflicting information on the economy, Fed officials have decided to see the glass as half full." They are thinking about making an exit rather than continuing to boost the economy with their automatic, huge monthly outlay. Instead, it may begin to "increase or reduce the pace" of those purchases in response to economic activity.

The news that the Fed may begin to tighten its monetary policies resulted in U.S. Treasuries reaching a two-month high for the ten-year yields, simultaneously reducing their price. Meanwhile, the Dow Jones closed down nearly 27 points yesterday after late trading caused it to fall below the 15,100 mark.

Most agree that the central bank's policies have been responsible for increasing the stock market over the last few years.

In the wake of the news, investors will be watching these highlights more closely:

•Stocks remain near record highs over the top three indices. Last week closed the Dow with a record high, while yesterday the S & P hit a new high intra-day, and the Nasdaq reached its highest point in nearly 13 years before retreating for the close.

But although the S & P traded at the highest P/E ratio in three years using 2012 earnings, stocks are still trading at less than 15 times earnings' estimates for 2013.

•Retail sales are up unexpectedly. Economists expected sales to decline, and while some sectors did, car sales and building materials led to an overall increase since last month.

•Most major companies have announced their first quarter earnings, and nearly 75% have met or beaten analysts' estimates.

Tesla Motor, an electric car maker, published its first quarterly profit last week, amid a continuing rally in its shares. Tesla sales are now reportedly outperforming German luxury makers.

•China hasn't lived up to expectations.
Despite optimism about the country's aggressive monetary policy which helped the Nikkei rally by 42% since the start of the year, and industrial production expansion in April, Asian markets ended mixed. Two indices declined slightly, but the Nikkei was supported by the weakening yen.

•European markets finished yesterday mixed, losing drive after last week's strong performance.

As QE Infinity is terminated and the Fed's monetary policy tightened, how will the market be affected? Investors will be watching.