Daily Gains Letter

Safe Stocks to Shield You from Fed’s Bad Decisions

By for Daily Gains Letter |

 unemployment rateIt was just a week ago that the Federal Reserve, pointing to an improving economy, said it would continue its quantitative easing program—at least until America’s job market improves substantially. We weren’t, however, told what “substantially” looks like.

Many think that means an unemployment rate of 6.5%. And to get there, the U.S. would have to create somewhere in the neighborhood of two million jobs. That’s assuming all things remain equal—but, of course, they never do.

The Federal Reserve also said that, thanks to the economic rebound, it would consider tapering its monthly $85.0-billion purchase of Treasuries and mortgage-backed securities by the end of the year.

On top of that, the Federal Reserve said it could end its quantitative easing policies altogether in 2014.

Federal Reserve Chairman Ben Bernanke’s celebratory remarks may have been a little premature.

The Department of Commerce reported on June 26 that gross domestic product (GDP) in the first quarter of 2013 grew 1.8% over the fourth quarter of 2012. Previously, the Bureau of Economic Analysis (BEA) forecast first-quarter 2013 GDP growth of 2.4%. (Source: “National Income and Product Accounts Gross Domestic Product, 1st quarter 2013 [third estimate]; Corporate Profits, 1st quarter 2013 [revised estimate],” Bureau of Economic Analysis web site, June 26, 2013.)

Aside from home construction and government, the final 2013 first-quarter GDP report from the Commerce Department showed downward revisions. For example, consumer spending—which accounts for almost 70% of U.S. economic activity—increased by just 2.6%, much less than the forecasted 3.4%. That may not sound like much, but it means spending was 23% below forecast.

Granted, the numbers reflect the U.S. economy as it happened in the first quarter, and we are now on the tail-end of the second quarter.

But downward revisions in a fragile economy could easily spook consumers and business owners, and could undercut future growth, which had, according to the Federal Reserve, been showing early signs of bouncing back.

When you look at the big picture, it would appear as though first-quarter GDP numbers do not really support the current bull market, which saw the S&P 500 climb 9.5% during the first quarter and the Dow Jones Industrial Average advance almost 11% year-to-date. The Dow Jones Industrial Average is now up more than 13%, while the S&P 500 is up more than 12%.

Despite reassurances from the Federal Reserve, the U.S. is not out of the woods—not by a long shot. If anything, Wednesday’s numbers should remind us just how vulnerable the economy is—and why the Federal Reserve probably won’t be tapering back its quantitative easing policy any time soon, which should make investors happy.

For investors unsure of where the economy is headed, it might be a good idea to consider some of the larger companies with a long track record of capital appreciation and continued dividend growth.

Kraft Foods Group, Inc. (NASDAQ/KRFT) and The Procter & Gamble Company (NYSE/PG) are two excellent examples of companies that can weather a jittery market.

Even in economically uncertain times, investors don’t have to decide between income and growth. For patient investors who like to get paid (in either cash or free shares with reinvested dividends), there are a large number of great dividend-paying stocks to choose from.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: -1 (from 1 vote)

Tags: , , , , , , , , ,