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Inevitable correction: Wall Street expert considers market, the Fed and investing



By Dian Vujovich
Special to the Daily News

After a year when stocks handsomely rewarded investors, it's not surprising that equities would correct, says one well-respected Wall Street investment professional.

Jason Trennert, managing partner of Strategas Research Partners LLC and CEO of that firm's broker-dealer, Strategies Securities LLC, was in Palm Beach last month as the guest speaker at Cypress Trust Company's Luncheon & Investment Forum.

A frequent guest on CNBC and widely quoted in the financial press, Trennert has not been a fan of the Federal Reserve's quantitative easing policy and looks forward to the days when interest rates return to normal.

In a recent telephone interview, Trennert discussed the market and the Fed's tapering and tightening policies and offered a few investment ideas for Palm Beachers.

Question: How do you feel about the Federal Reserve's decision on Jan. 29 to continue reducing its bond purchases by $10 billion a month?

Answer: I don't think the Fed's easing policy has been all that helpful so I am in agreement with the idea that (it) should start to normalize rates.

Q: What's the difference between the Fed's tapering and tightening policy? I know the two can be confusing.

A: The simple answer, (regarding tapering) is that the Fed is still adding liquidity, meaning buying securities, but it is just at a slower pace. Instead of purchasing $85 billion in bonds a month, that number was first reduced by $10 billion and then another $10 billion and is now at $65 billion. So they are still expanding the size of their balance sheet but tapering (the total dollar amount of bond purchases they make each month).

Q: Do you think the Fed is going to continue to reduce buying bonds by $10 billion a month?

A: That is what they have indicated they are going to do, and I think it is safe to take them at their word. But you know, life might intervene in the interim. I think the Fed is trying to be as transparent as possible. And it has generally been a good idea to pay attention to what they are telling you they are going to do. There have been investors who have tried to over-think what the Fed is doing and have been punished. So it has been easier just to listen to what the Fed kind of tells you they are going to do.

Q: And what would tightening be?

A: Tightening is withdrawing liquidity from the system. You'd see that in their balance sheet and it would actually shrink. I'd have to say that they are a long way away from that. The most obvious example of the Fed actually tightening would be higher interest rates, but again we are a long way from that now.

Q: January has not turned out to be the greatest month in the market for equities. Do you think this is just a correction or sense that we are in a bear market?

A: No, I think it is more of a correction -- a correction that is probably long overdue. Last year, the market was up more that 30 percent in total return terms with very little volatility so I think it is natural that you'd have sort of a pause that refreshes.

And if you look at interest rates around the world, particularly in the developed world, I don't know that there is a lot that would suggest that this is a systemic problem.

Q: Do you suggest clients take money off the table when their portfolios are up 30 percent? Doing so seems to be something people might think they should do but then they often don't.

A: We've told people that there was a good chance we would get a correction. But we view a correction as an opportunity to buy, rather than an excuse to sell.

Q: Do you have any broad-based investment ideas for equities given current market conditions?

A: I actually think it's a good idea to get somewhat more cyclical in your portfolio in certain sectors. The financial or technology (sectors) might be interesting -- even industrials might be places to start to build positions as the market falls.

Q: Based upon experience, knowing that both long- and short-term investors can make the same investment mistakes over and over, what's the most important investment tip you would suggest for each?

A: For individual investors, if they own bond funds, I think they have to be very careful with the idea that owning them is a perfect proxy for cash. The mistake they make is thinking that there is no difference between a bond fund and a money market fund and that is just not the case.

(In bond funds), you have interest rate risk so a long-term investor has to think about the potential for inflation. While that (inflation) may be a long way off, if you really are truly a long-term investor, there will be a cost to all the liquidity the central banks have provided and the cost will be inflation. So, you are going to have to think about that regarding the asset allocation in your portfolio.

Q: How long is "a long way off"?

A: That is hard to say. We don't know the time or the hour but I do think there is a strong relationship between money growth and inflation over long periods of time. It would be hard to think that the central banks could add this much liquidity and not have it be inflationary at some point.

Q: And for the short-term investor?

A: I think the short-term investor has to be prepared for a correction of somewhere in the order of 5 to 10 percent from here, given the size of the run-up that we've had.

And, what the short-term investor has to be wary of is not to confuse the market with the economy, because I actually think there are signs the economy is improving right now. As we saw last year, the market is not the economy and there are times when the economy is doing better than the market and vice versa.

So a potential risk for short-term investors is to confuse the two and see the sell-off in equities as a reason to get bearish on the economy because there are signs in housing and capital spending that would suggest otherwise.


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