Shifts in Federal Reserve Policy Mean Opportunities for Savvy Investors
The Fed ran the printing press last year, adding $1 trillion to the markets. Investors cannot overlook the effect that ending this will have on asset prices.
With all of the focus on Federal Reserve "statements," don't overlook the impact of Fed actions! The Fed ran the printing press last year, adding $1 trillion to the markets, which lead to the greatest multiple expansion since the tech bubble. That program is winding down and will end in a matter of months. Whether interest rates increase at some point after that or not, an investor cannot overlook the effect that ending the program -- which was implemented with the specific intention of increasing asset prices -- will have on asset prices.
Investors have been in a constant state of cognitive dissonance as asset prices race higher but economic fundamentals remain tepid. Since the crisis policies that have fueled asset reflation are ending, it would be prudent for investors to reduce risk exposures as they navigate the uncertainty of this policy transition. The effort being made to soothe the market in the wake of Chairman Janet Yellen's comments yesterday (March 19) should tell you that the the financial markets and the US economy are fragile. Investors have never been in this position before, and no one knows whether asset values can hold without the support of excess liquidity. While the substance of the Fed statements were not tremendously different than what was expected, I think what investors saw yesterday was prudent risk management as the markets sit near all-time highs and face the uncertainty created by a shift in policy. Sharp investors will understand that this uncertainty creates opportunities, and I have mentioned before on the Buzz & Banter where I am looking for them. Investing is not a race, and managing risk is a critical skill that should help preserve the returns earned in recent years.
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