Covestor managers react to FOMC minutes

by Michael Tarsala

The Fed is not convinced another round of QE3 is necessary, at least not now.

There was no strong consensus in the Fed minutes on the need for additional securities purchases right away. While a few members wanted more stimulus to help promote full employment, others only noted that more easing could be an option if the economy were to worsen.

Many investors — including some Covestor managers — would welcome some help from the Fed. Past quantitative easing helped to ignite stock market rallies.

“ I sold my short position in the ProShares Short S&P 500 (SH) early this month because I was expecting some easing and decided not to fight the Fed,” said Bill DeShurko, manager of the Dividend and Income Plus model. “Any action now may be on hold until after the presidential election.”

DeShurko said he is about 75% invested in stocks right now, with about 25% cash. He made only the one position change in the six weeks leading up to the meeting; he averages a little more than two transactions a month in his investment model.

This may be be more than a case of just putting QE3 on hold, though: DeShurko’s read on the minutes is that there were questions as to whether any Fed action would even be effective.

Also of note, a few Fed participants indicated in the minutes that they were seeing signs that low interest rates might be tempting some investors — not necessarily limited to the equity markets — to take on imprudent risks.

“It is becoming clearer that the Fed has depleted its arsenal,” said John Gerard Lewis, manager of the Stable High Yield model. “Instead, the prospect of business-friendlier tax and regulatory policies would have a profound and immediate effect on improving the economy. This would unleash the cash that businesses have been cautiously hoarding, resulting in business expansion and job creation.”

The next FOMC meeting is scheduled for July 31 through August 1.