Last week, as the outlook for Federal Reserve Chairman Ben Bernanke's confirmation turned doubtful, I reduced the proportion of stocks in clients' portfolios from over 90% stocks to less than 15% today. The economic recovery does remain on track, in my opinion, but doubts regarding Bernanke's confirmation by the Senate raise a red flag.
One might quibble over whether the Fed should have bailed out AIG or supported large investment banking companies, like Goldman Sachs (GS), but I give Bernanke a pass if he made a few mistakes, possibly, while making rapid-fire decisions which averted the Great Depression Round II. Under his stewardship, Fed innovations stabilized the banking system.
The Fed's cautiously stimulative monetary policy will enable the business cycle to continue its natural path, moving from recession to sustained growth, with little inflation. If Bernanke is forced to retire as Fed Chairman, uncertainty among investors will rise because his replacement may be regarded as somewhat of a wildcard. Of course, Christina Romer or Larry Summers would be fine picks, and I would be confident that they would refrain from doing anything dumb, and the economic recovery will continue.
But the stock market is another story. Recent doubts that Bernanke will be reappointed threaten to shatter the confidence of investors and darken the bright light at the end of the economic tunnel that has drawn investors along the track to higher and higher stock prices. If Bernanke's nomination for reappointment is confirmed by the Senate, I will consider raising stock holdings to near 100% of client portfolios, again. However, any changing of the guard at the Fed will make for a shaky stock market and I will await signs of stabilization in stock prices or clear improvement in coincident economic indicators before committing more capital to stocks.
