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Don't Underestimate Yellen's Impact: What it Means for Your Portfolio

The former Fed Chair stole the show last week. Here's what it all means going forward.
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While we had a presidential inauguration and a smooth transition of power last week, Janet Yellen stole the show during her appointment testimony, in my view. Assuming Yellen is confirmed as Treasury Secretary this week, I think she will be revolutionary rather than evolutionary in that role.

Markets seemed to get most of their gains on the week from the moment she started testifying. I don't think you can underestimate her potential impact on the economy and markets:

Closer Alignment Between the Fed and Treasury

Steven Mnuchin took several steps in this direction, especially at the peak of market turmoil last March, but Yellen is extremely well-positioned to develop that relationship further. While officially some of the programs created back in March are scheduled to wind down, expect them to be used as templates going forward.

Creative and Innovative Solutions

Whether through an Infrastructure Bank or harnessing the banks as conduits for various lending programs (like in the Main Street Lending Program), look for Yellen to think outside the box, with help from her knowledge of the Fed and connections there.

Equality

The one complaint about monetary policy (and there are lots of complaints about monetary policy depending on who you ask) that is likely to be addressed is that it seems to directly impact large companies and businesses but is less effective as you move to smaller and smaller entities and projects. I don't know what policy Yellen will create, but bet on her to explore ways to ensure that monetary (and fiscal) policy have a more consistent impact across a broad swath of the economy. She will work to enhance transmission mechanisms as part of this.

Labor and Jobs

Yellen is a labor economist by training and that background will play a bigger role in her work at the Treasury than it did when she was at the Fed.

I expect a lot out of (likely) Treasury Secretary Yellen and believe she will deliver.

What That Means for Your Portfolio

1. Small companies should do well. Value should do well

2. Companies that rely on small companies should do well.

3. Lenders to small companies and individuals should do well.

4. Housing should have strong support.

5. This should support my already bullish view on Business Development Corporations (BDCs).

6. Yields should rise, but they will rise very slowly -- don't worry about a taper tantrum. I will write more about the noise surrounding taper tantrums as I think it is completely unfounded. Yes, it is possible to be bearish Treasuries but not worried about a taper tantrum.

At its simplest, you can say we now have a Treasury put along with the Fed put, but I think that understates what Yellen will try and do.