Economic stimulus stock gains come to mind with Fed Chairman Ben Bernanke scheduled to speak shortly at an annual Federal Bank conference at Jackson Hole, Wyoming. The Fed Chairman will speak at the Kansas City Federal Reserve Bank’s annual get-together. As usual when the Fed chairman speaks markets listen. There is speculation that the US Federal Reserve will take steps to create another economic stimulus to counter the threat of the world economy sagging back into recession, the dreaded “double dip” that pundits have been talking about. Stocks in Europe and the US have rallied in anticipation of the Fed stimulating the economy. Unfortunately the USA has a history of economic stimulus stock gains that are only temporary and this history goes back decades. Considering that an economic stimulus commonly costs the US Treasury money there is a decided risk in creating stimulus packages when the major issue confronting the USA and its economy is the massive debt that every man, woman, and child in this nation bears. It does not take overly sophisticated fundamental analysis to see that economic stimulus stock gains are often temporary and that the sum total of many stimulus packages is a mounting debt that drives the economy and the stock market down.
Having said our piece about the continually mounting US debt burden, what about economic stimulus stock gains for investors? Smart long term investors bought stocks at sale prices just after Standard and Poor’s downgraded US debt. Value stock investors commonly look for underpriced stocks with a reasonable margin of safety and good forward looking earnings. When stocks prices dip they move in and buy. Long term investors will be wary about short term economic stimulus stock gains. On the other hand short term investors may wish to pick their stocks and buy in anticipation of a market rally if the market responds well to an upcoming announcement by the Fed. The key to profits with economic stimulus stock gains will then be timing. Getting in before the market jumps and getting out before the next round of earnings reports fail to confirm economic growth will quite possibly be the key. A reasonable way to approach this situation may well be to buy calls on promising stocks and to buy stock if and when a rally occurs. At that point buying puts of the same stock could be useful to protect economic stimulus stock gains in the event that such gains fizzle out. Picking new winners is one thing if analysis is totally based upon projected company earnings and another thing if analysis is based upon guessing what the Fed will do next.
As usual we are not suggesting that investors look to profit from economic stimulus stock gains or that they ignore the potential for a rally. Our advice is that investors should be mindful of opportunities that the stock market offers and of its history, especially as regards short term economic stimulus stock gains. Debt and growth are related but the relationship is not a positive one.