The market freak-out: A Fed-inspired buying opportunity

The Dow Jones Industrial Average fell by more than 400 points in the 20-hour period following yesterday's non-news statement from Fed Chairman Ben Bernanke. For anyone paying attention, this should represent a screaming buying opportunity. Let's review. The Fed, having already pushed short-term interest rates down to zilch, has spent the past five years ensuring rates stay low through a quantitative easing program that now amounts $3.4 trillion worth of bond buying, and still growing at a pace of $85 billion per month. Simple logic, even in a world in which speaking in billions has become passé, would suggest that the current pace of quantitative easing can't go on forever. The Fed has said as much in virtually every public comment over the past 18 months. Last month, Mr. Bernanke was brazen enough to go way out on a limb and imply that if the economy continues to improve and if unemployment continues to fall, the Fed might possibly eventually maybe consider tapering the pace of monthly Treasury bond purchases. For some, that bold claim was the first shoe to drop, as witnessed by a Treasury bond selloff that has since kept the yield on the closely-watched 10-year safely above 2.1%, which is about 3% above the May 3 low. Mr. Bernanke's comments yesterday were predictably safe and neutral, while justifiably trying to remind anyone who was listening that, yes, quantitative easing cannot go on in perpetuity. As obvious and redundant as his comments were, they apparently sounded like another shoe dropping to some investors. “People are so panicked right now, and they are really misinterpreting what the Fed has been saying all along,” said Matt Lloyd, chief investment strategist at Advisors Asset Management. For starters, there's no good reason to believe that any responsible level of tapering would be bad for equities, since it would suggest a stronger economy and lower unemployment. Secondly, and perhaps more importantly, there's no good reason to believe we are that close to the point where the Fed would start reducing its pace of bond buying. It's also important to keep in mind that any tapering is likely to be exactly that; a slow, deliberate process. “Even if the Fed said they will cut their monthly bond purchases to $65 billion from $85 billion, that's still a lot of quantitative easing,” said Mike PeQueen, managing director and partner at HighTower Advisors LLC. Beyond the tapering of quantitative easing, which is still qualifies as remote concept at this point, keep in mind that the Fed is also standing with both feet on short-term rates. On that issue, the Fed has made it clear that any rate tightening will have to wait for an unemployment rate of at least 6.5%, compared with the current 7.6%, as well as something that starts to look like inflation. “Right now we are so far away from any tapering, or even 6.5% unemployment,” said Mr. Lloyd. “Most people believe the real unemployment rate right now is at least 9%, so we're years from hitting that [6.5%] target.” With regard to quantitative easing, we're clearly in uncharted territory at this point, but investors should still find some comfort in the fact that during the past four Fed tightening cycles dating back to the 1980s, the economy was growing by an average of 3.68%. That compares to an average growth rate over the past 12 months of 1.8%. While it is never easy to go against the grain of the market, it is usually the strategy that makes the most sense in the long-run. Or, as Mr. Lloyd put it: “This is looking like a great buying opportunity for people who have a roll of Tums nearby.”