Daily Gains Letter

Fed’s “Great Exit” a Sustainable Strategy?

By for Daily Gains Letter |

Fed’s “Great Exit” a Sustainable StrategyFor much of last week, the global markets were taking a beating on growing concerns that the central banks will start easing their economic stimulus. Before the markets opened Friday morning, Reuters boldly announced that the rout was over, and U.S. markets opened trading up. (Source: Jones, M., “GLOBAL MARKETS-Shares pick up, dollar steady after bruising selloff,” Reuters, June 14 2013.)

Two hours later, though, Wall Street was singing a different tune. The U.S. markets slipped after the International Monetary Fund (IMF) announced it cut its 2014 growth outlook for the U.S to 2.7% from three percent. The unemployment rate for 2014 is projected to decrease slightly (on average) to 7.2 %. (Source: “Concluding Statement of the 2013 Article IV Mission to The United States of America,” International Monetary Fund web site, June 14 2013.)

Time will tell if these projections will come true. After initially predicting U.S. 2013 growth of 2.2%, the IMF revised it downward to 1.9%; the IMF continues to maintain that lowered projection. This tepid growth is expected to keep unemployment hovering around 7.5% for the remainder of 2013.

The IMF noted that the Federal Reserve needs to carefully plan its exit strategy to avoid hurting financial markets. The best way to do this, it maintains, is to continue its $85.0 billion a month bond-buying program until at least the end of 2013.

In addition to continued economic stimulus, the IMF also said Washington wasn’t doing enough to cut long-term budget deficits—though it would seem that higher deficits go hand-in-hand with money printing—and that Washington needs to cut entitlement spending and generate higher revenues.

What this appears to suggest is that there is no sustainable exit strategy in place. In fact, an ill-designed exit strategy could cause irreparable damage to American households, especially in light of the fact that the IMF believes the automatic spending cuts (sequester) hacked 1.25%–1.75% off growth. Compared to the central bank’s quantitative easing policies, this sequester is a drop in the bucket.

Still, it shouldn’t be a huge surprise that the IMF lowered the U.S.’s economic outlook in 2014. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, and during the second quarter, 81% of S&P 500 companies issued negative EPS guidance. This does not point to a strong foundation of sustained growth.

While the Dow Jones and S&P 500 continue to do well, eventually, they will have to reflect America’s economic reality, not the Federal Reserve’s.

Despite the IMF revising its estimate of U.S. 2014 economic growth downward by 10%, conditions could get even worse if tensions in the Middle East flare up, the eurozone remains stagnant, China’s growth slows even more than projected, and the exit-strategy-impaired central bank continues to print off even more money.

Under this cloud of uncertainty, investors looking to shore up their retirement portfolio might want to consider avoiding industrial metals. A slow economy means there will be less demand for base metals and industrial metals (copper, tin, zinc, lead, nickel), because they are used in construction and technology.

Ongoing uncertainty concerning when the central bank might begin its exit strategy has created a volatile investing environment on Wall Street. Until investors know when the Fed is going to begin its “Great Exit,” they’ll be trying to time the market and reposition their portfolios. For some investors, instead of looking for what they should add to their portfolio, they might want to also consider which stocks they should avoid.

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