Parsing Fed Taper Talk… How Investors Should React… And More…
A few years ago, I was fortunate enough to be able to take a trip to Yellowstone National Park.
If you’ve never been, I strongly recommend you do so. It’s one of our nation’s greatest treasures. In the parts of the park where you go to see the geysers, you will feel like you’re on another planet. And aside from sightings of moose and buffalo, you’ll be inundated by view after view that looks like this:
When we went, it was in June. Peak season. And the ski resort town of Jackson Hole, Wyoming was packed. The only accommodations we could find for the first two nights of our stay was in a Motel 6.
Not being aristocrats by any means, we were happy to have it. But the room was just about the size of our rental car, and it set us back a couple hundred dollars – per night.
In normal years, something tells me the experience is probably quite different when members of the Federal Reserve meet for its annual Jackson Hole economic symposium. But the event, which kicked off on Thursday, is being held virtually for the second straight year due to Covid.
To Taper Or Not To Taper?
The big thing investors were keen to get a sense of is Fed Chair Jay Powell’s plans for tapering.
Minutes released (on Aug. 18) of the July (27-28) meeting indicated that the Federal Open Market Committee (FOMC) members were growing increasingly split on whether to start winding down the Fed’s quantitative easing (QE) program.
For a brief refresher, this is the program in which the Fed purchases bonds on the open market, thus reducing the supply. This leads higher prices and lower yields on the bond market. This in turn, helps lower borrowing costs for companies – which leads to more capital spending, hiring, etc.
Currently, the Fed is buying $80 billion of Treasuries and $40 billion of mortgage-backed securities each month. And as my colleague John Persinos pointed out over at Investing Daily, the Fed’s balance sheet has ballooned to more than $8.3 trillion:
Indeed, a number of Fed governors had voiced support for at least beginning the tapering discussion earlier this week.
According to MarketWatch, those include Dallas Fed President Robert Kaplan, Kansas City Fed President Esther George, St. Louis Fed President James Bullard, Cleveland Fed President Loretta Mester, and Philadelphia Fed President Patrick Harker.
But “hawks” and “doves” alike realize that threading the needle will be key, of course.
Inflation and the Covid Delta variant have been persistent concerns so far, and any sudden moves would threaten to undermine much of the economic progress that has been made.
So now that we’ve set the table, let’s get the word from the horse’s mouth, so to speak.
In remarks this morning, Powell said, “My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment.”
He also indicated that in the recent July meeting, he was of the same opinion as a majority of participants that it would be appropriate to reduce asset purchases sometime this year if economic conditions continued to evolve as anticipated.
How This Affects Us
You can read Powell’s full comments here. But let’s get down to brass tacks… How will this impact the market?
That’s a little less certain. My guess is that we may see a jump in volatility as this plays out, but it’s important to keep a couple things in mind. First, the Fed has been clear that there is no discussion about raising short-term interest rates any time soon. Tapering will come first. And then… we’ll see.
Second, while it’s important to keep an eye on this stuff (because it does impact the market – and, in turn, us), you shouldn’t overly concern yourself with the machinations of monetary policy. Keep your eye on the prize when it comes to your investment decisions.
Here’s what I mean…
Let’s say you are looking at a growth stock that could become “the next big thing”. But you’re also worrying about how the Fed will impact the market. Well, I’m sorry to say, but you are either wasting your energy fretting, or you simply don’t have the opportunity you think you have. If it is really a ground-breaking opportunity, then it will prove so by its own merits in the long run.
The same is true if you’re a more conservative, income-oriented investor. While the Fed can impact income securities, the truth is that you don’t have to worry about the day-to-day moves of the market if you own the right stocks…
That’s why my colleague Nathan Slaughter and his research team have released their most recent report after months of research… In it, you’ll learn about a group of “bulletproof” high-yielders that have weathered every dip and crash over the last 20 years.
With this group of income-payers, it doesn’t matter what the Fed does. Every single one of these picks has a strong balance sheet, a proven track record of holding up in any market, and they continue to raise their payouts each and every year. And they all offer yields of 5% or more right now…