Is the Dow Really Hostage to the Fed?
Investors have been looking forward to this day for weeks, as the Federal Reserve will announce what could be a big policy shift in its handling of monetary policy and its quantitative-easing program. Yet forgotten are the numerous occasions when the Fed has managed to thread the needle with its announcements, using cryptic language that supports multiple interpretations of future actions and leaves everyone with more questions than answers.
This morning's lull in the Dow Jones Industrials , which has all but one of the 30 stocks moving less than 1% so far today, reflects anticipation more than an awareness that investors may not get the clarity they so desperately crave. While the Dow might be down just 20 points as of 10:55 a.m. EDT, the potential for a storm of activity later in the day is hanging over the market.
The antidote to Fed-induced paralysis is to look at individual companies and see what's happening with their underlying businesses. For AT&T and Verizon , for instance, threats of higher interest rates have reduced the perceived value of their dividend-producing businesses, so the stocks are down 0.8% and 0.9%, respectively, in fear that the Fed's decision may send rates higher. Yet their high yields greatly exceed what you'll get from the bond market even if rates rise substantially, and more importantly, the potential for further growth is much more important for both companies. As Verizon and AT&T start to look beyond U.S. borders for new opportunities, investors should note just how important international growth can be for U.S. stocks -- growth that the Federal Reserve arguably has far less control over.
At the same time, paying up for defensive stocks isn't always the best move. Coca-Cola shares are up 1% today as investors seek havens from possible market turbulence. But at more than 20 times trailing earnings, the stock is far from inexpensive, especially with earnings slated to grow only 7% to 9% this year and next. The price might be justifiable if you think international growth will accelerate once the global economy gets over its recent slump, but unfavorable trends in Coke's large domestic market don't paint the prettiest of pictures for the company.
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Finally, be sure to keep your eyes open for business-model changes. Adobe Systems has jumped 6.4% this morning as its recent move toward a subscription-based revenue model continues to bear fruit. Some investors may have been confused by the drops in profit and overall revenue, which ordinarily signal weakness. But Adobe has voluntarily given up large, up-front, lump-sum payments for its software in exchange for recurring annual revenue from software subscriptions, offering a more attractive price point and ensuring a more dependable revenue stream going forward. Investors are right to reward that move, regardless of what the Fed does this afternoon.
The article Is the Dow Really Hostage to the Fed? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Adobe Systems and Coca-Cola. 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.
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