(Dow Jones) Whether it stimulates economic growth, the Federal Reserve's plan to buy an extra $600 billion in Treasury securities over the next eight months is influencing wealth managers' recommendations for their clients' portfolios.
The second round of "quantitative easing" since the dark days of 2008 is meant "to promote a stronger pace of economic recovery" while keeping inflation in line, the Fed said in a statement on November 3.
In reaction, the net cost of Treasury securities-traditionally seen as secure-return vehicles for capital protection-has increased. This distortion makes Treasuries less attractive, especially in taxable as opposed to tax-deferred vehicles.
And with municipal and corporate bonds also under pressure, stocks look like more suitable assets for the "protected basket" portion of private-client portfolios than usual, according to Jason Pride, head of investment strategy at wealth-management firm Glenmede.
In particular, Glenmede extols "quality stock" in U.S. companies with good balance sheets and high cash flows. These issues are less apt to tumble in the face of market shocks than the broad equity market, and they're generally likelier to prosper in a slow-growth economy, says Pride.
Glenmede is also recommending a "secured option strategy" in which a portfolio manager buys a stock index and sells rights to buy into the same index. This puts a cap on some upside but it generates a steady source of income, according to Glenmede.
Matthew Gelfand, a senior wealth advisor with the wealth-management firm Rockefeller Financial and formerly an economist at the Fed, is also "favorably disposed toward stocks" in light of the Fed's Treasuriy-purchase plan. That said, he notes that "equity prices have gone up awfully fast" since August, and may be due for a correction despite good third-quarter numbers from many companies.
Outside of stocks, Pride likes global fixed income-especially emerging-market government bonds-as a way to benefit from the weak-dollar effects QE2. On the alternative side, Pride recommends "a reasonable allocation to commodities other than gold, especially industrial metals and agricultural produce.
Still, the biggest impact of QE2 on private-client investment portfolios isn't in strategies to mitigate its immediate effects, but in the possibility of its ultimate success.
"If all this has the desired outcome and generates more business activity and lower unemployment, then this will create a healthier economic environment-even if the stock market has been anticipating this for the past few months," says Gelfand.
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