Dow Morning Report: How the Fed Could Hurt Home Depot and Caterpillar
Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
For the second straight day, the Dow Jones Industrials didn't produce major moves, falling just 28 points as of 11 a.m. EST. With Janet Yellen expected to testify before Congress later this week as the nominee to succeed Ben Bernanke as chair of the Federal Reserve, investors appear on edge as they contemplate the impact of future monetary policy on their investments. In particular, Caterpillar and Home Depot could potentially suffer big hits if the change in Fed leadership prompts any sort of reversal of monetary policy.
By all accounts, Yellen is likely to continue the policies of her predecessor, with economists generally seeing her as being among the least prone to tighten monetary policy prematurely. That has led many to conclude that quantitative easing is likely to continue for a longer period of time under Yellen than it might otherwise have, despite some recent numbers on the economic front suggesting that the recovery might be accelerating. With her focus on employment, Yellen is likely to push for lax monetary policy not only until unemployment rates fall to key levels, but also beyond if labor participation rates don't match up to her expectations.
Yet with investor expectations so firmly entrenched in the bullish camp, any departure from her dovishness could make Yellen a disappointment. Already, Dallas Fed President Richard Fisher has said that quantitative easing can't go on forever, and if discord within the Federal Open Market Committee increases, Yellen might choose to compromise, rather than taking a hard line in her opening days as Fed Chair.
Caterpillar and Home Depot would be vulnerable to such a surprise for similar but distinct reasons. On one hand, Home Depot has benefited greatly from the boom in the housing market over the past year, with loose monetary policy and direct intervention in the mortgage market having helped spur further growth for the home-improvement retailer. But Home Depot has come off its highs since mortgage rates started rising, and the inevitable tapering could make investors even more cautious about its prospects going forward.
Meanwhile, Caterpillar has performed abysmally over the past two years, missing out on the bull market entirely as it struggles with the slowdown in construction and infrastructure activity. Caterpillar's focus is much more international, relying as much on a recovery in China as on continued improvement in U.S. economic conditions. Yet the Fed's policies have been instrumental in driving even reduced levels of construction and infrastructure spending. With Caterpillar already projecting poor results a year into the future, it could be even harder for the heavy-equipment maker to bounce back if the Fed's new chief doesn't live up to investors' hopes.
Looking for growth in any economic environment
Home Depot has been a strong growth stock in recent years while Caterpillar has fallen, but there might be a better way to find the growth stocks you want in your portfolio. Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks -- and he wants to share it, along with a few of his favorite growth stock superstars, with you! It's a special free report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains and click here for instant access to a whole new game plan of stock picks to help power your portfolio.
The article Dow Morning Report: How the Fed Could Hurt Home Depot and Caterpillar 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 Home Depot. 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.