Your Money: Fed's call means little for equities

The world will be watching next Tuesday when the Federal Reserve meets to decide if - and how much - to "taper" the bond-buying program it began two years ago. And no, the stock market won't fall apart, says one market strategist.

Seth Masters, chief investment officer at Center City's Bernstein Global Wealth Management, predicted in 2012 that the Dow Jones industrial average could hit 20,000. He has not backed away, either, predicting now that it could happen by 2018.

Moreover, the Fed's decision should mean virtually nothing for equities. "Will higher interest rates affect stocks?" he said on the sidelines of a conference Monday at the Rittenhouse Hotel. "In fact, that's not going to be a problem. When interest rates increase from a low base, it's actually slightly good for stocks. It means the economy is improving, therefore ownership in companies is worth more."

The 10-year Treasury, for instance, has risen sharply from around 1.5 percent to 3 percent today - in percentage terms a huge jump. But in real terms, "that's still low," Masters adds.

President Obama's pick for a new Fed chair also shouldn't hurt equities. "Concerns that a new Fed chair will lead to changes in policy in the short term are extremely unlikely," Masters said, "regardless of who the chair is."

The S&P 500 is trading at a forward price-to-earnings ratio of 13.9, vs. 15 times earnings in October 2007 and 25.5 times earnings in March 2000, the apex of the last two bubbles.

Masters advises staying away from overpriced high-dividend-yielding stocks, which investors have piled into and bid up dearly.

"We agree [those stocks] are safe, but it's all about what you pay for that safety." Bernstein still predicts a 7.5 percent total return for the stock market. Others disagree. Boston-based Grantham, Mayo, Van Otterloo & Co. L.L.C. lowered its return forecasts based on eroding corporate profit margins.

As for bonds: "The second quarter of 2013 may have marked the bottom of the cycle in rates," Masters said. He explained that the bond market has cycled back to where interest rates were in 1955 - roughly 3 percent - down from rates in the high teens in the 1970s and 1980s.