Most of Wall Street was caught by surprise this week when the Federal Reserve did the unthinkable and started the long process of killing off quantitative easing once and for all.
But not you.
You were 100 percent prepared for the tapering news because you were told to expect it five days earlier. As I noted last week:
“The Treasury market has been trying to tell us something. Bond prices have been plunging for several months, while 30-year Treasury yields just briefly tagged a 28-month high. This has been happening despite aggressive bond buying by the Federal Reserve …
“My prediction? They drop a taper bomb and start dialing down those purchases, probably by at least $10 billion.”
More importantly, outgoing Fed Chairman Ben Bernanke sounded a much more confident tone on the economy in his post-meeting press conference. And he indicated that the incoming chairman, Janet Yellen, fully supported the day’s action.
|Bernanke did the unthinkable this week and caught Wall Street off guard.|
Furthermore, he said that barring some economic catastrophe, the $10 billion reduction in the QE program we’ll get in January is just the first of many steps. It should be followed by cuts of roughly an equivalent size — or more — at every single meeting in 2014.
That, in turn, sets the stage for the next major surprise. (At least to the Wall Street crowd.) I’m talking about the first actual short-term interest-rate hike in 2014.
It took a little while for the post-Fed volatility to settle out in all kinds of asset classes. But a few trends began to assert themselves, and I think they will dominate the trading action in the weeks and months ahead.
Bonds should continue trading like death warmed over, with prices falling and interest rates rising into 2014 and beyond.
Rate-sensitive stocks should continue to underperform as they get dragged down by the lead anchor of falling bond prices.
The U.S. dollar should actually benefit — especially against currencies like the Japanese yen — as higher rates attract some of the capital that has flowed away from our shores.
And economically levered stocks should do well, particularly in select industries that have strong underlying fundamentals. Think aerospace, domestic energy, diversified industrials and more.
Want some specific numbers you can zero in on? How about 5 percent to 5.5 percent for the 10-year Treasury note yield? That’s almost double where we are now, and more than triple what 10s were yielding in mid-2012. But I think it’s an entirely reasonable target over the intermediate term, given a recovering economy, a Fed that’s beating a hasty retreat from ridiculously easy policy, and a bond-market bubble that’s only a fraction of the way through the unwinding process.
Many of the positions I’ve been recommending in Safe Money are designed to prosper from precisely these market conditions, and many already are. We nailed the Fed meeting results, and I believe we’ll nail many more calls in 2014 and beyond — and I’d love to welcome you aboard. To get started, all you have to do is click here.
Until next time,