Getting Ahead of the Fed to Protect Your Investments in 2014
After months of getting the markets riled up with talks of reducing quantitative easing, the Federal Reserve will, once again, continue the “taper-shuffle” dance.
According to a survey by Bloomberg, most economists now expect the Federal Reserve to begin reducing its quantitative easing program in March of 2014. (Source: “Fed QE Taper Seen Delayed to March as Shutdown Bites,” Bloomberg, October 18, 2013.)
Just to recap: The Federal Reserve has put into place the most aggressive quantitative easing program in American history, literally spending trillions of dollars to try and boost the American economy. After several years of this aggressive quantitative easing program, we are at a point now where the economy still can’t accelerate.
Now, with Washington taking center stage, the increased uncertainty is throwing another curveball at the American economy. Sure, a temporary budget deal was reached, but nothing has been solved—and we’ll surely see more bickering between politicians over the next few months.
With this backdrop, can we really believe that the American economy will begin accelerating next year?
If the trillions of dollars spent over the past couple of years haven’t generated any growth yet, I just don’t see many reasons to simply assume that everything will be alright in a few months. This is odd coming from me, since I’m an optimist by nature; however, we’ve been fooled so many times into thinking that the situation will improve that being somewhat skeptical really does make sense in the current environment.
Obviously, with the government shutdown, economic reports have been on hold. Since the Federal Reserve needs economic data to determine the state of the economy and whether it should begin tapering its quantitative easing program, no adjustments are possible for at least a couple months.
As a result, we’ll see more money pushed into the stock market simply because quantitative easing by the Federal Reserve is still running at full speed. While it would be great to see significant economic growth emerge, I would question the strength and sustainability of that growth.
When you think about it, if the economy is growing at such a weak pace now with the most aggressive quantitative easing program ever put in place by the Federal Reserve, what will happen when the Fed pulls the plug?
I just don’t believe that the current economy is anywhere near strong enough to stand on its own legs.
This economy is like a junkie, addicted to the extremely strong stimulant of quantitative easing being pushed by the Federal Reserve—that’s all that’s holding the U.S. economy up.
The problem is that at some point, the price needs to be paid. With the Federal Reserve’s balance sheet growing, trillions in quantitative easing sloshing through the system, and no real, long-term structural change by Washington to help America’s economy turn the corner, we’re just delaying the inevitable.
As an investor, this postponement of the Federal Reserve reducing its quantitative easing program will help over the short term to keep interest rate-sensitive stocks holding their own. However, I would look to begin taking profits and avoiding any stocks that rely on interest rate-sensitive financing to close their deals, as interest rates will inevitably reach higher.
As we move into 2014, we will find out exactly how strong (or weak) the U.S. economy really is, and that could bring substantial pain to many sectors of the market. If the stocks you own need low interest rates to keep pushing sales, you can expect those companies to be on the front line over the next year.
This article Getting Ahead of the Fed to Protect Your Investments in 2014 was originally published at Investment Contrarians
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