Fed policy only helping the rich

Cheap money creating two-tiered economy.

Judging by recent headlines — office rents in San Francisco are poised to surpass Manhattan for the first time since 2000, the S&P 500 is perched at a record high, the Nasdaq composite is at its highest level since the millennium, and Steve Ballmer, the former CEO of Microsoft, just bought the L.A. Clippers for a staggering $2 billion — you’d think the U.S. economy was on an unstoppable tear. Think again. The U.S. will be lucky to log 3.0% annualized economic growth in the second half of this year. That’s an improvement, yes, but hardly anything to write home about when you consider that, for the last six years, economic expansion has been the weakest modern post-recession growth on record. Meanwhile, the Labor Department’s broadest measurement of unemployment still is in double-digit territory at 12.2%.

So, while Federal Reserve Chair Janet Yellen reiterated her commitment to zero interest rates so long as economic data remain weak at the Fed’s big shindig in Jackson Hole, Wyo., last week, it’s worth asking whether Fed policy has jumped the shark. The Fed is still fighting the last financial crisis and, in doing so, the Fed’s policies may be contributing to a new problem: the creation of an increasingly two-tiered economy at the expense of the middle class.

Millions of retirees are struggling to get by on nest eggs that offer little to no return thanks to low interest rates. And 7.51 million Americans working part time still are anxious to find full-time work. In addition, the cost of food, the very thing people actu-

span Monday on Google after punching in the search words “stock market correction.”

But saying with any certainty that the stock market is on the precipice of doom, simply because it happened to hit a big, round number like 2000 is pure guesswork. Stocks rise and fall on what happens in the future. And the direction of stock prices is determined by the health of the economy, corporate profitability, the level of interest rates and inflation. For now, all of those readings are pointing positive.

Stocks are often driven by news headlines and policy shifts, such as the Federal Reserve’s current move to turn off its bondbuying stimulus as early as October and a coming hike in short-term interest rates, which are now at record lows.

Markets can also tumble when stock prices get overvalued, which some pundits now argue. (The index is now trading at 17.87 times its past 12-month earnings, which is up from a P-E of 12 in the fourth quarter of 2011 but below the long-term average of 18.7, dating back to 1988, according to S&P Dow Jones Indices.)

Unexpected shocks can’t be ruled out, either. And there are plenty of hot spots around the world now — the Ukraine/Russia crisis, the emergence of a new threat in Iraq and fighting in Gaza, to name a few — that could tip the market barometer down.

For now, however, the positives are outweighing the negatives, Russ Koesterich, BlackRock’s global chief investment strategist, told clients Monday in a research note.

“Low interest rates and an improving U.S. economy are trumping full valuations and lingering geopolitical risks, allowing stocks to move higher,” Koesterich said.

“The 2000 milestone is meaningless in and of itself,” says Rob Stein, CEO of Chicago-based Astor Investment Management. But what is meaningful, he adds, is the current strength of the business conditions fueling the rally.

“If the economy and market fundamentals continue as they are, it would appear that the risks associated with owning stocks is worth the return,” says Stein. “I think the market can move higher from here.”

Whether investors should be buyers or sellers here depends largely on how big a helping of stocks the investor already has, says William Lynch, director of investments for Hinsdale Associates.

This is no time to have all your eggs in one basket.

“As we keep saying, as long as more money keeps chasing fewer shares, stock prices will keep rising.” Charles Biderman, portfolio manager at TrimTabs

“If an investor is overweighted in stocks relative to his targeted equity allocation, now would be a good time to reduce equity exposure,” Lynch advises. “If an investor is underweighted in stocks, buying equities on any market pullbacks or dips should be a winning long-term strategy.”

Lynch doesn’t advise chasing stocks at these levels for a few reasons, preferring only to buy during downturns. One is valuation. The market isn’t cheap anymore.

“The stock market is definitely not cheap, but it is not necessarily expensive, either, compared to other alternatives, such as bonds and money market funds,” says Lynch.

Another reason to tread cautiously and buy only on market dips, Lynch says, is the long time since the last double-digit per- centage drop in the market. “The longer the market goes without a significant correction, the greater likelihood exists that a correction could be larger when it finally does occur.”

A third reason to be cautious is the fact that “most of the good news is already reflected in current stock prices, so the upside in stocks will be limited,” Lynch says.

Bulls like Charles Biderman, portfolio manager at TrimTabs, argue that stocks will keep rising as long as money keeps poring into the market.

“As we keep saying, as long as more money keeps chasing fewer shares, stock prices will keep rising,” says Biderman. But he warns that once the Fed starts to raise interest rates, there will be less cheap money around to buy stocks, which could cause stock prices to fall.

The bull still has more gas in the tank, says Karyn Cavanaugh, senior market strategist at Voya Investment Management.

“The market is a buy at 2000,” says Cavanaugh. “(Bull) markets do not die of old age when they reach a new high. ... I anticipate stronger corporate earnings going forward in the wake of a better U.S. economic backdrop. Therefore, the S&P 500 could move even higher beyond 2000.”