More Than a Sugar High

The recent decision by the Fed to delay any tapering may be a preview of what to expect by a “Yellen Fed”. As the Fed appeared to remove “virtually every yardstick or goal post” that they have provided recently, one thing is certain, “they seem determined to keep the accelerator nailed to the floor as they drive the economy at full speed.” 1 According to Cornerstone Macro, based on the Fed’s move, it appears increasingly likely that “growth is more likely to reaccelerate.” 2 Several economic indicators began to confirm this last week (i.e. Citi Economic Surprise, Philadelphia manufacturing, among others). Surprisingly, investors remain worried about deflation and stagnation. As market strategist Dave Rosenberg pointed out, “nobody showed up at the latest 10-year TIPS auction.” 3 In fact, direct bidding was less than 2% of the auction, which “is the lowest such take-up since October 2009 when deflation was a serious risk and we were still in the throes of just the first round of QE.” 4 This is a reflection of the “heightened complacency over the outlook for inflation” despite the Fed continuing to inject massive liquidity into the system. As U.S. ten-year rates have headed back near 2.60%, “much further progress [lower] seems unlikely” according to Anatole Kaletsky at GaveKal.5 Essentially, “fears of long-term stagnation in the U.S. economy now seem completely unfounded,” as rates would only head dramatically lower if we were headed to a Japanese-style deflationary period.6 I believe the threat of deflation has passed and I expect this belief will be further supported by one of the most dovish (soon-to-be) Fed Chair(wo)men.

The equity market initially reacted quite positively to the Fed decision last week, however, the bull market skeptics continue to claim that the market has been on a “sugar high.” As Yardeni Research notes, despite skeptics claiming that Bernanke “has been the sugar man, injecting the sweetener into stock prices,” the bears have failed to acknowledge that S&P 500 companies continue to maintain “record holdings of liquid assets.” 7 This is in addition to the trillions of dollars they have returned to shareholders via dividends and share repurchases over the past few years. So not only is the market correlated to Fed’s purchases, “it has also been highly correlated with the sum of share buybacks and dividends paid by S&P 500 companies.” 8 Last week’s broad market rally also shows how underweight investors are in equities (and risk assets in general). Of course, this has renewed more “bubble” talk. As Eddy Elfenbein of Crossing Wall Street states, “the bubble talk is itself a bubble,” and we will see the “tremendous fear bubble” deflate over time.9 Not surprisingly, the recent cover of Time magazine reflects this lingering fear, suggesting that “five years after the crash, it could happen again.” Funny -- although there is a bull on the cover, could it be a bear in costume? Based on research by Tobias Levkovich of Citi, equity price multiples should continue to expand, as “risk premiums drop” and domestic equity fund flows improve. Furthermore, “with more than $9 trillion of household cash on the sidelines, there is plenty of dry powder to push share prices higher as confidence returns.”10 I believe there are other factors that support a secular bull market in equities as well. For example, per Ned Davis Research, “a new era for allocation is in progress.”11 As they have been seeing an investor preference for cash over bonds, they expect that the S&P earnings yield and Treasury yield will eventually converge, which suggests that we may see significant upside in equity markets. I expect the traditional views on asset allocation to transform with time. Michael Mauboussin of Farnam Street highlights that “For older people the problem is not that they don’t have the knowledge or wisdom to make good decisions, it’s that they tend to become cognitively lazy and fall back on rules of thumb that served them well in the past.”12 Unfortunately, these dated views on asset allocation may leave some investors behind. As noted historian John Lewis Gaddis stated, “The problem with the future is that it isn’t as clear as the past.”

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 25 years of experience in the financial industry. Ms. Rosenau focuses on strategic and tactical asset allocation, investment planning strategies and equity portfolio management strategies. As a result of her extensive knowledge and expertise in the equity markets, she was named the Equity Market Strategist for HighTower. In addition to this role, she performs due diligence on the firm's third party research relationships and continues to add, monitor, and prune research providers where necessary. Prior to joining HighTower she worked for various sell-side firms beginning her tenure at Wertheim & Co./Schroders Plc.

Ms. Rosenau was recently ranked #14 in Barron's 2013 Top 100 Women Financial Advisors. She was also chosen for Barron's 2013 Top 1,000 Advisors list, ranking #42 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC, a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.

This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower Advisors, LLC or any of its affiliates. In preparing these materials, we have relied upon and assumed without independent verifications, the accuracy and completeness of all information available from public and internal sources. HighTower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them.

This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. Carefully consider investment objectives, risk factors and charges and expenses before investing.

1 Macro Intelligence 2 Partners. Fed: Utterly No Framework. September 18, 2013.

2 Cornerstone Macro. Economic Research. September 23, 2013.

3 Gluskinsheff. Breakfast with Dave. September 20, 2013.

4 Ibid.

5 Gavekal Research. Don’t Fight The Fed. September 19, 2013.

6 Ibid.

7 Ed Yardeni. Yardeni Research. September 19, 2013.

8 Ibid.

9 Eddy Elfenbein. CWS Market Review. September 20, 2013.

10 Tobias Levkovich. Citi. Monday Morning Musings. September 13, 2013.

11 Ned Davis Research Group. Global Strategy Focus. September 17, 2013.

12 Michael Maboussin. Farnam Street. August 28, 2013.

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