Fed Offers Anchor as Solution to Choppy Economic Seas

 

I think it’s wrong that only one company makes the game Monopoly.” — Steven Wright

 

Ben Bernanke drew a solid line in the sand last week, announcing that the Federal Reserve was anchoring its rates to the unemployment rate. And, while not an action that changes much in the short term, it could prove to be the start of a more transparent Fed.

The gist of Bernanke’s announcement was that anything above a 6.5% unemployment rate was too high, and that the near-zero rate that is currently in effect could remain in place until a sub-6.5% level is hit, rather than limited to 2015, as has been previously proposed.

The caveat given by the Fed head was that inflation projections needed to remain under 2.5%. While it should be no surprise that the Fed would link two key elements of its mandate, which is unemployment levels and inflation, it is relatively new terrain to link unemployment with Fed rates. It can be interpreted as a commitment by the nation’s central bank to keep utilizing its arsenal of tools until the economy manages to regain solid footing and, as reflected in a 6.5% unemployment rate, a solid level of growth.

As for the transparency reference?

Well, the Fed likes to play things close to the vest. The more commitments it makes, the fewer variables it has to play with. Wall Street won’t have to play a guessing game, at least in terms of rates, because now there is an anchor, a solid reference, not really subject to interpretation.

The market didn’t seem that impressed with Ben’s offerings this time around, as both the Dow Jones Industrial Average (DJIA) and S&P 500 Index (SPX) ended down on the week, breaking a stretch of three winning weeks in a row.

Something else Bernanke talked about last week has the potential to impact Wall Street’s bottom line even more than the rate anchor. The Volker Rule, which among other things, attempts to limit the speculative bets made by the big banks, apparently is getting closer to approval by regulators.

What the measure actually ends up looking like remains to be seen, of course. But Bernanke, who may not be in the top Fed spot much longer, may want to conclude his term with at least a footnote that some degree of bank regulation occurred under his watch.

What the Periscope Sees

For the third week running, technology is at the top of the Sabrient SectorCast ETF Rankings. The Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis.

Here is a list of some of the top performing technology ETFs, along with updated year-to-date returns as of the second week in December.

FDN — First Trust Dow Jones Internet Index, +18.79%

XLK –Technology Select Sector SPDR Fund, +12.73%

IXN — iShares S&P Global Technology Sector Index Fund, +13.52%

IGV — iShares S&P GSTI Software Index Fund, +5.35%

VGT — Vanguard Information Technology Index Fund, +12.07

As an alternative to buying the ETFs themselves, consider buying long call options, as a way to leverage your portfolio’s funds. April expiration calls that are several strikes out-of-the-money may be utilized for the trade.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.