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Beyond The Noise, Herndon Capital Management Third Quarter Newsletter

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Beyond The Noise

"The End of the Low Quality Rally...Maybe"


Authored by: 
Derik Coffey 
Portfolio Specialist 

While the Federal Open Market Committee’s (“FOMC”) decision to delay the tapering of quantitative easing has assuaged the market’s fears of rising interest rates, investors were distracted for several weeks by the debacle in Washington regarding the government shut-down, the debt ceiling debate and fears of a U.S. default. Although these concerns have been addressed, at least in the short-term, given the deal passed by Congress to fund the government and raise the debt ceiling, we believe Fed policy matters most as evidenced by the performance of the market over the past several quarters including the 3rd quarter where the S&P 500 posted an increase of 5.2%. The key question in our view remains when and to what extent will the Federal Reserve begin tapering its accommodative monetary policy and to what extent will the stock market react. We at Herndon believe the market has been trading ahead of fundamentals for some time, helped by lower interest rates, as companies with weaker fundamentals have outperformed. We believe this trend will reverse itself in the future given the possibility of rising interest rates and renewed investor focus on fundamentals. 

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