Tag Archive | "Fed Taper"

Investing During The Fed Taper


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Investing During The Fed Taper | Interpreting The Fed’s Policy Change

The Fed FOMCInvesting during the Fed taper creates yet another investment challenge, but also many investment opportunities.  Outgoing United States Federal Reserve Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) once again surprised many on Wall Street when they announced on December 18, 2013 that they would reduce their quantitative easing (QE) bond buying program by $10 billion per month.  They are still going to be buying $75 billion per month in Treasury Bonds and Mortgage Backed Securities until they taper again.  However, wise investors need to take a long-range view and assess not only what investments make sense as the Fed tapers, but also investments that make sense once quantitative easing has ended and the Fed starts considering increasing short-term interest rates.  The stock market will not only have to contend with no additional quantitative easing stimulus, but will also have to start pricing in short-term interest rate increases by the Fed, which Ben Bernanke projected would start to occur towards the end of 2015.

Fed Taper Janet Yellen

The good news is that the long-awaiting beginning of the Fed’s quantitative easing tapering opens up new investment opportunities and provides some certainty where none existed before.  It is important to use the word “some” certainty, because Ben Bernanke made it clear to the investment community that continued tapering is conditioned upon favorable economic trends remaining intact.  If they do, he said by the end of 2014 the Fed would be done tapering and the quantitative easing program will have officially ended.  Of course, since he is departing and will be replaced by incoming Federal Reserve Chairwoman Janet Yellen, there is some uncertainty regarding whether she may change the Fed’s tapering criteria and make it harder for the Fed to continue tapering, as she is one of the most dovish members of the Fed.  Time will tell, but assuming the United States economy remains strong through 2014, it is reasonable to assume that by the end of 2014 the current quantitative easing program will be a thing of the past and the focus will be on future increases in short-term interest rates.  Once the Fed makes a policy change, it usually sticks with it for an extended period of time.

Sell Bond Funds and Go Short Bond Funds To Make Money During The Fed Taper

Investing During The Fed Taper
If you are still overweighted in bonds or bond funds as a result of the shift to bonds that occurred during and after the 2008 stock market crash, now is the time to considering rebalancing your bond holdings or exiting bond investments altogether.  As interest rates rise, bonds lose value.  The principal losses for those holding bonds purchased in recent years could be significant when interest rates eventually rise.  Moving out of bonds may save you losses, as bonds and bond funds lose value.

You can put the money freed up by selling bonds and bond funds to work in other investments, including going short bonds via short-oriented bond Exchange Traded Funds (ETFs).  Many investors may not realize that there are ways to make money as interest rates rise and bonds decrease in the value.  Short-oriented bond ETFs go up in value as interest rates rise and Treasury Bonds lose value.  These ETFs should do well in an environment in which interest rates rise and Treasury Bonds decrease in price, which is likely to occur as the economy strengthens and the market start to price in future increases in short-term interest rates by the Fed.

  • ProShares Short 20+ Year Treasury (NYSE:  TBF) – This ETF is designed to achieve daily investment results that are one time the inverse (-1x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
  • Direxion Daily 20+ Year Treasury Bear 1X (NYSE:  TYBS) – This ETF is designed to achieve daily investment results that are one time the inverse (-1x) of the daily performance of the NYSE 20 Year Plus Treasury Bond Index.
  • iPath US Treasury 10-year Bear ETN (NYSE:  DTYS) – This ETF is designed to achieve daily investment results that are one time the inverse (-1x) of the daily performance of the Barclays 10Y US Treasury Futures Targeted Exposure Index.
  • iPath US Treasury Long Bond Bear ETN (NYSE:  DLBS) – This ETF is designed to achieve daily investment results that are one time the inverse (-1x) of the daily performance of the Barclays Long Bond US Treasury Futures Targeted Exposure Index.
  • ProShares UltraShort 20+ Year Treasury (NYSE:  TBT) – This ETF is designed to achieve daily investment results that are two times the inverse (-2x) of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
  • ProShares UltraPro Short 20+ Year Treasury (NYSE:  TTT) – This ETF is designed to achieve daily investment results that are three times the inverse (-3x) of the daily performance of the 20 Treasury Bond ETF.

Buy Stocks and Funds Tied To Economic Growth To Invest During The Fed Taper

Successful investing during the Fed taper requires focusing on securities and industries that typically do well during an economic upswing.  The biggest takeaway from the Fed’s tapering announcement is that the economy is stronger than it has been in years and will likely continue to grow stronger.  Stronger economic growth usually means higher stock prices for in stock sectors tied to economic growth.

To invest during the Fed taper, focus on stocks that have traditionally done well as the economy picks up in strength.  While some analysts might opine that it is too late to buy cyclical stocks that do well during times of strong economic growth, that is probably not the case.  The United States economy likely has two or three years of strong economic growth ahead of it before the next recession.  Stocks that traditionally do well during a strong economy, such as companies involved in home renovations and companies that supply materials used in construction, will likely continue to see gains over the coming years, as strong economic growth increases demand for their products.

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