Why the Sidelines May Be the Best Place for Investors Right Now
The last Federal Reserve meeting on September 17 and 18 was one of the most shocking in recent memory. It wasn’t shocking what the Fed did; rather, it was what the Fed didn’t do that was shocking.
After such a long period of quantitative easing, the market was expecting the Federal Reserve to begin reducing its bond purchases totaling $85.0 billion per month.
However, the Federal Reserve stated that it believed the U.S. economy was not strong enough, so the central bank kept the quantitative easing policy in place for the time being.
The minutes from this Federal Reserve meeting were released recently, and it’s interesting to note that it held off on tapering, even though there was a lot of debate over the economy and the status of the quantitative easing program.
It appears that the majority of the members do believe that the Federal Reserve will begin reducing its asset purchase program shortly, with this particular part of the quantitative easing program coming to completion by mid-2014.
Remember: this inaction happened before the government shutdown. Now, with uncertainty rising and the politicians still fighting, it appears that the Federal Reserve was right in thinking that uncertainty would increase on the federal level and in keeping the quantitative easing program in place.
With a new leader soon to take the helm of the Federal Reserve, the question is: how will the Fed reduce quantitative easing going forward and what does this mean for your investments?
Already we’ve seen interest rates rise just on the discussion of the beginning phase of quantitative easing reduction. Imagine what will happen when the Federal Reserve really does begin adjusting its quantitative easing policy!
Many market participants, I think, are far too complacent. We are already seeing a large drop-off in mortgage origination from the increase in interest rates. This is even as mortgage rates are still near historic lows.
With low interest rates jump starting much of the economic recovery, when the Federal Reserve does begin to adjust its quantitative easing policy, it’s questionable if the U.S. economy can continue to accelerate. In fact, this might tip our economy back down into slower growth and possibly another recession.
I’ve been warning my readers for the past couple of months that I would certainly look to begin reducing my exposure to the overall stock and bond markets. In fact, I’ve been warning about the bond market since last fall!
Generally speaking, when the Federal Reserve starts to begin reducing quantitative easing, I think there will be significant ramifications in the market. If you think of all of the interest rate-sensitive parts of the economy—including housing, car sales, big-ticket items—all of these are susceptible to a slowdown.
Another factor to consider is that when the Federal Reserve begins adjusting quantitative easing, institutions will need to factor higher interest rates into their models. As anyone who has done a discounted cash flow calculation knows, the higher the interest rate, the lower the present value of a future stream of revenue.
All of these factors fundamentally point to a picture of caution for the stock market. Until we start seeing revenues significantly improving for the stock market in general, I would begin raising cash and remain on the sidelines.
This article Why the Sidelines May Be the Best Place for Investors Right Now was originally published at Investment Contrarinas
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