WEEKEND INVESTOR --- Hulbert on Investing: Low-Quality Stocks Have Zoomed; Time to Shift Gears?
"Junk" continues to beat "quality" on Wall Street. Nearly four years after the end of the recession of 2007-09, it should be the other way around.</br></br>The Federal Reserve's monetary stimulus is a big reason for this unexpected outcome.</br></br>Because the Fed's easy-money policies won't continue indefinitely, however, investors might want to begin reducing their holdings of low-quality stocks -- which will be among the biggest casualties when the Fed turns off the spigot.</br></br>The Fed policies have distorted the markets because they encourage risk-taking. Through its quantitative-easing programs of injecting money directly into the economy, and by keeping short-term interest rates close to zero, the Fed has discouraged investors from keeping their money in conservative savings accounts and created powerful incentives for them to put more money into stocks.</br></br>So-called junk stocks -- the ones that have been the biggest beneficiaries of the Fed's policies -- are those of companies that otherwise would run the greatest risk of going bankrupt. They tend to be loaded with debt and have poor balance sheets. Even worse, they also tend to have inconsistent and unpredictable earnings.