Could the Fed Tapering of QE Be a Profit Opportunity for Small Investors?

The other day I was talking with a friend of mine, let’s call him Peter, whom I haven’t chatted with in a while. I wanted to catch up and hear how things are going for him and his family. 

He told me that he and his family are healthy, thankfully, but he also mentioned that he didn’t have the same sense of optimism in the economy as some other people. Essentially, he feels that the economic recovery and the move up in the stock market have bypassed him. 

In fact, I think many Americans feel they were bypassed. 

One concern for Peter is the low levels of interest rates. Because he is quite conservative, he has always tried to have some portion of his portfolio in bonds, attempting to earn some income from interest rates. 

Of course, as we all know, interest rates have been extremely low over the past two years. 

While he has been reading my articles, and he did reduce his holdings of bonds just in time before they dropped—a drop I’ve been telling my readers would happen for the past six months—Peter still isn’t confident enough in the economic recovery to start buying stocks. 

His concern is similar to the concern that many other people have: with interest rates being where they are and the economic recovery still weak, yet stocks are at all-time highs, what should I do? 

While Peter admits that he missed the move up in the stock market, he’s not alone. 

To be honest, if one were to look at both the stock market and interest rates in comparison to the current economic recovery, we really should not be at all-time high levels for stocks, based solely on the fundamentals. 

However, we are in extraordinary times. 

As I’ve written about many times, my opinion is that a large part of the move up in the stock market, especially over the past six months, has been primarily due to the market participants’ reactions to the monetary policy program implemented by the Federal Reserve. 

In an attempt to stimulate an economic recovery, the Federal Reserve not only is keeping interest rates low, but is now buying $85.0 billion per month in U.S. Treasuries and mortgage-backed securities. 

However, like I cautioned Peter, when the stock market is at an all-time high and an economic recovery is relatively muted, this is probably not the best time to put all your money to work. 

The most difficult thing for an investor to do, both professional and retail, is to patiently wait. We all want immediate results, but patience really is a virtue. 

Luckily, readers who have been heeding my advice will have gotten out of the long end of the bond market, which got hammered as interest rates rose approximately one percent in a very short period of time. 

I think we are setting up for a very volatile period near the end of this year. Don’t forget, September and October have had some of the biggest market crashes in history. With so many investors piled into the market, if they all try to rush for the exits, we could see significant carnage. 

I’ll tell you exactly what I told Peter: if I had stocks, I would begin taking profits and watch for a move by the Federal Reserve. Once it begins moving, I would sell and raise cash to wait on the sidelines for the inevitable sell-off. Interest rates aren’t high enough to begin piling into that asset class, and we will need cash to buy when investments become cheap.

~ by Sasha Cekerevac, BA 

This article was originally published at Investment Contrarians