Blog : Get Ready for the Yellen Rally

by Ed Zwirn on October 10th, 2013

Now that the expected has happened and Janet Yellen has been named as the president's nominee to fill the vacancy created by the end of Federal Reserve Chairman Ben Bernanke's term in January, the stock market is poised to continue the upward progression it has made throughout much of the year.

Investors have already given Yellen a ringing endorsement. The Dow Jones Industrial Average rose 3% on the Monday following the news last month that Yellen's main rival for the post, former Treasury Secretary Larry Summers, bowed out of the race, and the broader market followed suit, with the NASDAQ rising 1.7% that day and the penny stock-rich Russell 2000 gaining 2.4%.

The reasons for this Yellen rally have been widely noted. Yellen, who is currently Fed vice chair, has been a consistent advocate of using the U.S. central bank to promote employment (and with it the stock market) and was therefore considered less likely to pull the plug on the Fed's expansive monetary policy, particularly insofar as its $85 billion monthly bond buying program is concerned.

Investors in everything from penny stocks to blue chips stand to gain tremendously if this Yellen rally resumes. And, although the news of Yellen's nomination comes as no surprise, and has therefore been priced into the market, stocks can only go up as the Fed continues to pump up the economy by making more money available for investment.

The hitch of course is that the U.S. federal government has to first sort out its problems. Failure to resolve the government shutdown in a timely fashion can only serve as a drag on the economy, while failure to raise the U.S. debt ceiling can have catastrophic consequences.

But the political pressures on Washington to get its act together have been mounting, and there have been signs that the key players have been giving themselves wriggle room to resolve these issues without losing face. Republicans and Democrats have begun floating the possibility of a short-term increase in the debt limit to allow time for broader budget negotiations, and Barack Obama has invited lawmakers of both parties for talks aimed at resolving the impasse.

And make no mistake about it: The impasse will be resolved, if only because the alternatives are unthinkable. The solution our political leaders come up with will leave a bad taste in everybody's mouth, as popular programs get cut and both sides of the fence walk away from the deal with the taint of compromise, a taint that is painful to ideologues in this polarized era.

But the upshot will be anything but painful for investors, meaning that investors who know the lay of the land stand to win big as the losses caused by this latest self-inflicted wound reverse themselves and the Yellen rally reasserts itself in a big way.