Did the Federal Reserve Just Give Stocks the Green Light?
The much-awaited monetary policy decision came with a great deal of fanfare on Sept. 18. The market was clearly taken by surprise when the Federal Reserve announced it would continue its $85 billion in monthly bond purchases, and not taper its stimulus programs yet. The central bank's decision ran contrary to what many investors had expected, and turned a down day for the markets into a full-blown rally, which took stocks to new all-time highs.
Did Fed Chairman Ben Bernanke and company just give investors the green light to buy stocks? Or is a wait-and-see approach more appropriate, given the underlying themes of the Fed's decision?
Look to the likely winners
The clear winners from the Fed's decision appear to be the high dividend-yielding stocks that had been so severely punished in recent weeks. The Federal Reserve's threat of tapering sparked a sell-off in traditional high-yielding sectors, like utilities, real estate investment trusts, and oil and gas master limited partnerships.
In short, the companies worst hit were the ones that rely on long-term financing, businesses that would see their borrowing costs rise with a corresponding rise in interest rates.
For instance, even though utility Southern Co. is regarded as one of the highest-quality utility stocks out there, it wasn't spared from the yield flight. Shares had been hit hard, falling more than 15% since May on the threat of a rising cost of capital.
Meanwhile, Southern continued to do what it has always done, which is pay a market-trouncing 5% dividend yield. In addition, Southern has bumped up its distribution for 12 years in a row and has paid dividends for 262 consecutive quarters.
Even real estate investment trust Realty Income , which refers to itself as the "monthly dividend company" as a testament to its stability, saw its shares crater from $55 per share to less than $40 per share just over the past few months. This occurred despite the fact that Realty Income holds a high-quality tenant list.
Being a real estate investment trust, Realty Income is required to distribute at least 90% of its taxable income to its investors. The company has paid 518 consecutive monthly dividends on its common stock, and has increased its dividend 73 times since going public in 1994.
Ditto for oil and gas MLP Enterprise Products Partners , which had seen shares under immense pressure in recent weeks. The threat of higher interest rates is of particular concern for companies like Enterprise Products Partners, which rely on debt to finance their massive pipelines and storage facilities.
Enterprise Products units jumped more than 4% on the announcement, and investors were clearly reassured that the MLP's financing costs would remain low. And, Enterprises Products' 36 consecutive quarterly distribution increases and 4.5% yield are likely attractive again, if this is to be a low-yield environment for the foreseeable future.
In short, many of the market's traditionally "safest" equities, those that operate sturdy businesses that pump out reliable dividends to shareholders, became popular again in the blink of an eye. All three of these stocks rocketed higher in the aftermath of the Fed announcement. It appears, at least for the next few months, that Ben Bernanke isn't about to rain on the dividend parade.
Hold your horses: Not all is well
While the stimulus-addicted stock markets cheered the Fed's decision, a dose of skepticism seems to be appropriate in light of what this really means. The Federal Reserve made it abundantly clear that should the economy improve to a specified degree, it would take its foot off of the monetary gas pedal.
What the Fed's announcement really means is that the economy simply isn't in a good enough position to warrant tapering its massive stimulus programs, and I'm not sure that's such a good thing.
I fully understand that the market would rally on the Fed news, as it has proven its stimulus addiction time and again. At the same time, though, the more fundamental reality is that the economy is still not strong enough to stand on its own two legs, which can't be good for economic growth, corporate profits, and by extension, future stock prices.
As a result, while rising markets are always nice to see on the surface, deep fundamental economic issues remain, and investors should remain cautious as a result.
It's just a matter of time
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The article Did the Federal Reserve Just Give Stocks the Green Light? originally appeared on Fool.com.Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P. and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.