The shocking news that the Federal Reserve
start slowing down its money printing presses sparked a small
selloff in stocks.
The 3.6% drop in the S&P 500 may have you considering your
options. It's natural to be getting a bit uneasy, and thinking
now is the time to start selling and locking in the big gains
you've earned in recent years.
The market is up 142% from the 2009 lows. And the 10% gains in
2013 are equally impressive. Before you hit the panic button, and
start selling stocks, I'll urge caution.
Selling stocks today would be like leaving a baseball game at
inning stretch when your team is down one run. The game is still
being played, and the rules haven't changed.
What did change were Bernanke's recent comments that the Fed
could slow down its purchases of bonds - specifically U.S.
Treasuries and mortgage securities.
Today, I'm going to tell you why
I'm looking forward to the day when the Fed can allow
interest rates to climb
. And why the end of quantitative easing is good news for
Today we are currently in a unique "win-win" situation. There
are two possible scenarios, both of which are bullish for
The first scenario is that the Fed keeps QE3 running full
If the economic recovery is too slow, the Fed will be right
there, buying bonds to keep interest rates as low as possible.
This makes money cheap to borrow, and stimulates economic
We know that Ben Bernanke and the Federal Reserve will buoy
the stock market at all costs for years to come. They've done so
since 2009, and have no intention of changing their
The last thing that Bernanke will allow is a stock market
crash. He knows that he can avoid this by keeping the Fed
printing presses running 24 hours a day. And that's why
he's buying $85 billion in bonds a month.
We all owe the Fed gratitude for the profits these last four
years. However, having them pump up stock prices isn't good
long-term. Eventually the market has to stand up on its own two
Which brings me to the second scenario we're likely to
The Fed scales back on QE3 and allows interest rates to move
I know they won't start increasing interest rates until the
economy begins dramatically improving. When rates rise, it
will only be because the Fed sees an improving U.S. economy.
The best thing for the stock market is a robust economy with
healthy GDP growth, low unemployment, increasing wages, and
rising home prices.
The good news is that this is actually happening today. And
Thanks to a 11% rebound in housing prices and a stock market
at record highs, household wealth is at a record high. In fact,
American's have recouped all losses from the Great Recession. The
jobs front is positive as well, with unemployment down from 10%
in 2009 to 7.6%.
Not only that, but corporate profit margins are healthier than
ever. According to Merrill Lynch, S&P 500 profits have been
on the rise - largely since the beginning of the Fed's "Great
Easing" period beginning in the early 1990s.
Large Company Profits at Record Highs
I believe these record profits are part and parcel with Fed
policies. Low interest rates generally benefit strong companies -
who can borrow low to grow their businesses.
Right or wrong, the effect of easy-money policy is undeniable:
the American stock market is alive, well and charging higher.
Listen, I know that 0% interest rates are unsustainable.
They're not here to stay.
And the same is true of the Fed's monetary policy.
The Fed will roll back its efforts at some point soon. Whether
the slowdown starts at the June Fed meeting or one year from now
doesn't really matter. In the mean time, I'll stick with my
dividend paying stocks.