Nick Colas of ConvergEx Group has some interesting thoughts on how Fundamentals will replace the Fed and force market participants to think more micro and less macro in 2014:
We will shortly celebrate the five-year anniversary of the intraday “Devil’s Low” of 666 in March 2009, and the overwhelming narrative in revolving around the climb to new highs has been centered on the U.S. central bank’s liquidity measures. Even though corporate earnings are at very high levels, one must respect the bearish case that they wouldn’t be there without the Fed’s extraordinary measures. Ditto for the 15-16 price-earnings ratios the market currently enjoys.
By backing out of QE, the Federal Reserve will essentially begin the process of forcing markets to sing for their supper. We’ll start having the discussion of when they actually start to raise rates in the back half of this year; reducing QE is the prelude to that conversation.
If nature really does abhor a vacuum, then how are we going to spend all that time we’ve used over the past half-decade trying to analyze the Fed? I think it is going to go back to fundamental analysis and asset/stock selection. We are already starting to see some of this in the form of lower asset class and sector correlations, even during the recent sell-off. There is also the odd fact that exchange traded fund money flows have been negative year to date ($20 billion), and equity markets are only down 1.6%. ETFs have been the saving grace for the money management industry over the past five years, the one stop shop for virtually any expression of an investment perspective.
The skeptic would say that this is brokerage firm code for “buy our equity research, you’re going to need to be more choosy!” but that wouldn’t be a fair assumption to make. Nick’s painted some of the most accurate depictions of the current environment I’ve had the pleasure to read over the last few years – and I read everything. Also, it would make total sense that the macro should become significantly less important now that so many people are almost exclusively focused on it. Mr. Market has only one job – to frustrate the maximum amount of participants at all times.
Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York