Like most people on the planet, I enjoy watching the “Wizard of Oz” (featuring Minnesota native Judy Garland). One of my favorite parts of the movie was when Dorothy pulls back the curtain and discovers that the Great and Powerful Oz is just another one of us and has no supernatural powers. Perhaps this is what investors are thinking to themselves after Fed’s press event last week and how the Fed ending more quantitative aspects of its guidance, which could change the whole “Fed Watch” tone of market of the past few years.
Quantitative guidance I believe had a role for a while; especially during the depths of the crisis and early part of the recovery. The liquidity I thought was truly beneficial and on the qualitative side it gave investors at least the veneer that centralized experts could manage the economy and get us out of the mess. More recently however it seems that instead of analyzing companies, investors were hyper-analyzing Fed statements and playing guessing games on how the Fed might respond to new data—as measured in recently printed dollars. Thus it felt like we were constantly on the “where will the newly minted dollars go, to growth stocks of course” treadmill.
Now it seems as though the Fed is in the same situation as the rest of us; there no longer is a “formula” to drive our actions. Everything is now data dependent. We now as investors need to view new information about the market and the economy objectively and in conjunction with our individual holdings (or potential holdings), not as some vehicle that can quantitatively drive a certain measure of new liquidity and the beneficiaries of that liquidity. Hopefully, this leads to a situation where we all need to not pay as much attention to that man (now woman) behind the curtain and that we can get back to a stock picker’s market.