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.
Were we not saddled with a government shutdown and facing the threat of a technical default by the U.S. on its debt, it's likely the stock market would have reacted much more favorably to this morning's statement from the White House that the president will nominate Federal Reserve Vice Chairwoman Janet Yellen to succeed Ben Bernanke at the head of the central bank.
As of 10:20 a.m. EDT, the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.98%) have both moved less than a single point. Last month, on the Monday following the disclosure that Yellen's closest competitor for the position, Larry Summers, was bowing out of contention, the S&P 500 rose 0.6% after posting an intraday gain of 1%.
Why is the market amenable to Yellen's nomination? (I'm purposely using "market" over "investors"; I'll explain why.)
Because Fed-watchers know her as a dove with regard to monetary policy, someone who has pushed the Fed to consider unconventional tools, such as bond purchases ("quantitative easing"), in addressing the lackluster post-crisis recovery. Or, as The Wall Street Journal characterizes her this morning, in the title of a solid piece of reporting: "Janet Yellen, a Backer of Pushing the Fed's Policy Boundaries" (no sign-up required, courtesy of Yahoo! Finance).
While the evidence for the positive effect of quantitative easing on growth and job creation is mixed, no such charge can be levelled against the lift it has provided to risk assets, with stocks chief among them. The following chart shows stocks' price performance since the Fed announced its first round of bond purchases on Nov. 25, 2008:
The "liquidity rally" has produced a near double for the broad market, but note that higher risk segments of the market have performed even better, with small-capitalization issues (Russell 2000 Index, in red) and technology stocks (Nasdaq Composite Index (^IXIC -0.64%), in orange) and notching up stunning returns of 140% and 151%, respectively.
That chart makes clear why the stock market ought to welcome Yellen's nomination, but how should fundamental, long-term investors respond? With a shrug of the shoulders, frankly.
Regardless of who had been nominated, it's unlikely that the Fed would have pursued a radically different policy path. Furthermore, the Fed's effect on long-term business values is very limited (except, perhaps, inasmuch as the central bank can help steer the economy away from catastrophe). Competitive advantage, economic profits and time, these are the critical levers of wealth creation.
