Hutchens Investment Management: A Return of the “Old Normal”

CONCORD, N.H. - June 5, 2013 - PRLog -- As the investment world spends untold hours analyzing and modeling the potential outcome of a Federal Reserve policy change, the economic landscape trudges toward a natural rate. In actuality, the Fed will begin the tapering/unwinding of QE3 when the economy is capable of sustained unbridled economic growth. This seems far too logical and devoid of the chaos foretold by investment strategists. Interest rates, held artificially low since the inception of QE1 in December of 2008, and its subsequent follow- on’s, provide a safety net, fostering slow economic growth and outsized investment returns. Major averages recently surpassed their pre-crisis levels and bond investors have been rewarded with double- digit returns. This time spent under Fed monetization is referred to as the “New Normal,” according to David Minor of Hutchens Investment Management.

If you have not noticed, Fed policy is about to change and the consequences could be dire. This information comes from everywhere but the Federal Reserve. Chairman Bernanke has stated unequivocally the Fed will do what it believes necessary, but the when and how is unknown. As we discussed at length two weeks ago, the transition, when it occurs, may be far smoother than generally anticipated. Prior to implementation, key elements in place will be an economy with self-determining growth accompanied by lower unemployment. Should the Fed’s move prove premature, it stands ready to reintroduce palliative measures. All seems pretty simple to us.

The economy is well-positioned to move later in the year to fulfill Fed preconditions. While all eyes will be turned to the May employment release on Friday, these data are more of a lagging indicator heavily influenced by structural impediments (the margin of error is plus or minus 100,000 jobs). Currently, economic data are signaling a Spring soft spot, however, most negatives to economic growth are widely known and already in stock prices. These include the “fatal effects” of the Sequester, slow employment growth, deteriorating quarterly earnings, stagnating global growth, and more recently political scandal. On a brighter note, the housing recovery is broadening and despite the musings of the bubble crowd it is far from heating up. In fact, April home sales and starts are 67.3% and 52.6%, respectively, below their 2005 monthly highs. According to the March S&P/Case-Shiller data, the Home Price Composite Index, although up for all 20 cities year-over-year, is up only 10% off its lows and remains 28% below the pre- crisis highs.

Our investment strategy remains a full position in equities. The rise in market volatility in the past few weeks (+30.8%) is to many a confirmation of future market instability. To us, the increased volatility is indicative of market uncertainty, not of a chaotic outcome of Fed policy. However, the run-up since the beginning of the year for equities and the recent weakness in the economic data makes the possibility of a correction more likely. Longer term earnings growth should accelerate later in the year as private economy growth accelerates and the next leg of the bull market rises to new all-time highs and a return to the “Old Normal.”