Fed reflects "fair amount of optimism": strategist

Summit Place Financial Advisors' Liz Miller says the Fed's economic outlook and its pledge to keep buying bonds bode well for equity investors. But with yields expected to remain low, she tells Reuters' Fred Katayama why fixed income investors should consider preferred securities.

Video Transcript

FRED KATAYAMA: The S&P 500 shedding its gains and turning negative Wednesday afternoon after the Fed released its policy statement following its two-day meeting. Let's find out what the implications are for investors. We're joined by Liz Miller of Summit Place Financial Advisors. Good afternoon, Liz, and welcome back.

LIZ MILLER: Hi, there.

FRED KATAYAMA: Well, Liz, as expected, rates held steady by the Fed, but it also said it doesn't foresee any rate change through 2023, and it's now linking its monthly bond purchase program to economic conditions, that is, until the recovery-- till they see substantial progress on the recovery. Give me your thoughts.

LIZ MILLER: Well, obviously, investors expected no change and the interest rate level were pretty much at 0. And as a reminder, the Fed, since September, basically, has been buying about $80 billion a month in treasuries and about $40 billion a month in mortgages, and they confirmed they're going to keep doing that. So that was the subtle language. That they were going to keep pursuing that until they saw an uptick in employment and inflation.

I think we're seeing a little bit of a negative reaction because people always take this to the extreme. Investors worry this may mean we see inflation, but to my mind, what this really is saying is the Fed is saying, look, rates are near 0. These purchases are our only lever to support the economy, and we will keep doing whatever we need to support the economy. So from a monetary standpoint, we talk about that in terms of supporting things.

The monetary arm of our government is doing everything it can to keep the economy going. There's just not a whole lot left for them to do.

FRED KATAYAMA: Using a Fed often says in its parlance its full range of tools. Well, Liz, should investors be worried about inflation based on the Fed's move?

LIZ MILLER: You know, we've been worried about inflation for over 20 years. Since Volcker first raised rates to bring down hyper inflation in the '70s. Less and less adults even remember that time frame. I was a child. I don't really recall it just really in my history lessons, but we have forever worried about this feeling of hyper inflation, and through every economic cycle since then, we have seen that there just aren't other forces pushing inflation higher. So I think if the Fed lets inflation as we say move towards 2 and 1/2%, 3%, I think that many investors and savers, everyone with money in a savings bank across America is actually going to be happier, not worried.

FRED KATAYAMA: And Liz, they also put out its economic growth forecasts, lifting it to 4.2% from 4% for next year and also lowering the jobless rate by year end to 5% from 5.5%. That's rather rosy or slightly rosier, yet, we saw the market slightly sell off.

LIZ MILLER: Yeah, I think that the new economic update was a little surprising. I think it's optimistic. It's on the back of a vaccine coming earlier than many had hoped, and that's what we keep seeing in the market in these last couple of weeks of the year is that subtle move back and forth, trying to discern well how soon do we have in a vaccine? It's very exciting to see that the first people have started receiving a vaccine in America, but we really still don't have any clarity on what the ramp up could look like.

This estimate from the Fed was interesting because it really reflects a fair amount of optimism in how quickly we can get everyone vaccinated who needs to be, how quickly we can get this economy running again in 2021. I notice across Wall Street, most of the estimates going forward in 2021 are pretty positive, because we do all feel like, if we could just open up Main Street, there's a lot of pent up demand and a lot of opportunity to get people back to work. But there's a fair amount of uncertainty as to what that timing really is going to be.

FRED KATAYAMA: And lastly, this means that you know rates are going to be low for quite some time, which also implies the yields will be low for some time and people are really concerned about treasuries, for example. What would you recommend to investors who need to put some money into fixed income? What should they be putting it at this point?

LIZ MILLER: You know, we've been here before. We've been through the multi-year period with interest rates close to 0. First, we want to remind investors, use your fixed income as that anchor to safety. Don't use it just for income. Realize you'll get income off of dividends and other parts of your portfolio.

One area we look a little bit at is that gray area between equities and fixed income known as preferred securities, and that's exactly where they sit on the balance sheet of companies. They're not quite debt, but they're after the equity. I caution people. These can-- if a company has any type of bankruptcy, the preferred stock does tend to go to 0, but you have major institutions, Goldman Sachs, Morgan Stanley, with preferreds out there.

They tend to trade around $25 a share, so they're very liquid. They're affordable, and they're paying around 4%. So definitely higher risk, but I like that you can sell them easily if you get concerned, and you can bring a little extra income into your portfolio. iShares does have an exchange traded fund for the preferred, also paying out income north of 4% right now. And so if you don't want to try to choose a particular one, you could get that basket of preferred investments through one of the funds.

FRED KATAYAMA: All right, thanks a lot, Liz, for your insight in the Fed statement and also your thoughts on preferred securities.

LIZ MILLER: Thanks.

FRED KATAYAMA: Our Thanks to Liz Miller of Summit Place Financial Advisors. I'm Fred Katayama. This is Reuters.