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FOMC Meeting, No News Is Good News

01/26/2011

On Wednesday, January 26, the Federal Open Market Committee (FOMC) concluded its first meeting for 2011.  For FOMC aficionados, I have included 2011 schedule of FOMC meetings at the bottom of this post.

For the capital markets, the January meeting was a classic example of "No News is Good News."  Investors received just that with Wednesday's 2:15 announcement - No News.

  • No policy changes. QE2 continues to sail at the speed of $600 billion toward June 2011
  • A unanimous decision - no dissenters - at least not yet
  • Maintaining the principal reinvestment policy
  • Continued dissatisfaction with the rate of the economic recovery
  • Continued disappointment with the lack of improvement in the labor market

So "no news," in essence, means an extremely accommodative Fed continues to orchestrate a "wealth creation" reallocation from safe haven assets into risky assets.  Just look below at Figures 1.1, 1.2, 1.3, and 1.4. Beginning with the late August Jackson Hole acknowledgement from Chairman Bernanke that QE2 would set sail, a massive re-allocation trade has developed in the capital markets.

The Fed is encouraging owners of Treasuries, USD and, more recently, gold, to trade ownership and reinvest in the recovery assets of equities and corporate bonds.

Along the way, the Fed has even gifted to financial institutions the all-important steep yield curve once again.  In early October, the 2 to 10 year yield spread was 205 bps; today it is 280 bps.

My most recent blog discussed the Super Bowl selloffs of the past few years dating back to 2007.  My February calendar, to be released in the next few days, questions whether "red" truly is February's favorite color.

Is there vulnerability for a market correction in the near term? Sure. But, given the "no news" Fed and my expectation that 2011 is the ultimate "catch-up" year for the U.S., if a near term correction unfolds, I certainly have a plethora of assets I want to own - all "risky" not "safe havens."

Figure 1.1 US Ten Year Treasury August 2010 - January 2011 - Safe Haven Asset

Source: Bloomberg

Figure 1.2 SP 500 Index August 2010 - January 2011 - "Risky Asset"

Source: Bloomberg

Figure 1.3 Gold August 2010 - January 2011 - Safe Haven Asset

Source: Bloomberg

Figure 1.4 - US Dollar August 2010 - January 2011 - Safe Haven Asset

Source: Bloomberg

FOMC 2011 Meeting Schedule
January 26
March 15
April 27
June 22
August 9
September 20
November 2
December 13

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.