The Federal Reserve meeting on Wednesday and Chairman Ben Bernanke’s comments about tapering the bond buying program created a two day sell-off of almost every asset class. With stocks, bonds and commodities seeing across the board selling, one has to wonder why?
In my opinion, there are two reasons why the Fed would taper. The first would be the economy no longer needs the support of artificial growth and can function on its own. The second is the Fed sees inflation beginning to rise to levels which they would consider raising interest rates. If we listen to Chairman Bernanke’s comments along with the decline in commodity prices, inflation is not a concern. The Fed has also commented they intend to keep interest rates low until unemployment gets to around 6%. Therefore, it would seem that the Fed believes the economy is now in a position to grow without the need of help. I do not think we will see growth of more than a couple percentage points, but self-sustained growth none-the-less. In my opinion, that is a good thing. What I decipher is that we are off life support and breathing on our own once again. One could conclude the sell-off in equities that we have seen over the last two days may have been unwarranted and overreaction to what the masses believed to be a pre-cursor to an interest rate raise.
In my last newsletter, I mentioned that a 5-10% correction would not come as a surprise. I also commented that it would be short lived and present a buying opportunity. With the sell-off we have endured the past two days, we have corrected by 5%. Although there may be more of a short-term pullback, we are looking for opportunities to utilize cash for long term opportunities.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.