The Federal Reserve announced the official end to its quantitative-easing (QE) program this afternoon -- a decision that was in line with expectations. The statement had a few nuances that are worth pointing out.
First, consistent with previous commentary, the Federal Open Market Committee reiterated that interest rates on U.S. Treasury bonds would remain low for "a considerable time." Second, the Committee gave an upgrade to the U.S. economy in terms of jobs, household spending and business investment, with all this partially offset by a slower housing market. Third, the group indicated that it no longer sees the labor force as being underutilized -- meaning they view the job market as improving -- and it believes the likelihood of low inflation has diminished, meaning less deflation risk.
So what does all of this mean? Well, for one, the U.S. economy is better. We've been saying this for a while, and we expect further support from Thursday's first revision of third-quarter gross domestic product (GDP), expected to come in at a 3.2% annualized rate. An improving economy is a good thing. It also means the debate turns back to when the Fed will raise rates -- and this could mean the Fed will act in the springtime vs later in the year or in 2016. But, as always, the central bank will remain data-dependent.
Again, if rates go up for the right reasons -- that is, a better economy -- that is a positive. It also likely means that the dollar will remain strong relative to other currencies, especially given that many countries are going the other direction in terms of easier monetary policies. Finally, it means we can focus more on corporate results, which have been strong, having shown a 9.6% run on the bottom line and 5% on the top line.
We have the Action Alerts PLUS portfolio positioned for an economic rebound in the industrials, financials, discretionary and technology, and we will continue to overweight these groups. On the margin, if interest rates go higher, financials should perform the most -- but so should these others, especially since the earnings have been strong.
We're watching the energy sector just given the drop it has sustained: The group is down 15% from the highs. One stock we'll sell out of, and take profits in, is Cigna (CI). These shares have seen a nice 8.5% move back from the October lows, and we want some cash to be able to buy in to some of the earnings dips we've seen of late -- in Facebook (FB), Twitter (TWTR), American Express (AXP), SunTrust (STI), Cummins (CMI), Lear (LEA) and Panera (PNRA), among others.