What Will Happen to Your Stocks When Tapering Starts?

Tony Sagami

The Tacoma, Wash., vegetable farm where I grew up bordered the Puyallup River. There, Mother Nature regularly reminded us just how powerful (and dangerous) moving water could be.

People who underestimated the power of moving water often lost their lives in that river, and the local search/rescue team was kept unfortunately busy.

With this being "Fed week," I am reminded of the Puyallup River I was raised on, because money supply is the monetary equivalent.

Most investors greatly underestimate the power of massive amounts of money sloshing around our financial system, which has helped stocks to swim into unchartered waters.

Instead of losing their lives, though, investors could lose a big chunk of their life savings when Janet Yellen turns off/down the quantitative-easing spigot.

Could this also become "QE taper week" at the Fed? Many traders seem to think so.

How Long Will This QE Puppet Show Last?

The debate over when tapering will start is a robust one.

Some Fed-watchers think it could happen as soon as this month or even this week, when the Federal Open Market Committee meets tomorrow and Wednesday, Dec. 17-18.

Others are confident nothing will happen until Yellen takes over in 2014. (She will lead her first Fed meeting in March.)

The answer is that nobody outside of the Federal Reserve knows when tapering will begin ... but everybody understands that the $85 billion a month Fed spending spree has to come to an end soon.

We do know the FOMC wants to see a strengthening economy and lower unemployment first. And if you believe recent reports of each are accurate, "soon" could easily become "sooner."

Is the U.S. economy picking up? Some statistics suggest exactly that.

  • The U.S. economy created 233,000 jobs in November and pushed the national unemployment rate to 7%, the lowest rate in five years.
  • October sales of new homes rose 22% on a year-over-year basis.
  • Permits for new home construction are back to 2007 levels.
  • Americans are buying new cars in a big way. For the month of November, General Motors reported a 14% increase in new car sales, which was its best November since 2007.
  • Ford (up 7%), Chrysler (up 16%), Toyota (up 6%), and Nissan (up 11%) all report similar success stories.

Despite those fresh numbers, I am still in the skeptical camp and believe our economy and stock market are being largely held up by the Federal Reserve's puppet strings of quantitative easing.

And if you agree with me that things could get ugly — real ugly — once tapering starts, you need to make some preparations TODAY on how to handle the sea change in Federal Reserve Bank policy.

Option No. 1: Do nothing. Are you going to do nothing and just ride things out? If you are a long, long, long-term investor with an iron stomach, that's a strategy will work.

My experience, however, is that most investors who claim to be buy-and-hold-forever investors really aren't and then cry "uncle" when the financial pain gets too intense.

How did you react during the 2000-'01 bursting of the tech bubble or the 2008 financial crisis?

Option No. 2: Be a Market Timer. Have some sort of defensive, market-timing strategy in place to avoid the big downturns. What type of timing system is another entirely different column but a great starting point is the use of protective stop-losses, which I highly recommend.

Option No. 3: Trading Places. Or you could diversify your portfolio into assets other than U.S. stocks, such as bonds, cash, precious metals and non-U.S. stocks.

Moving some of your assets to places that don't suffer from 7% unemployment, trillion-dollar deficits and obsession with "tapering" seems like a smart move to me.

One region you should consider is Asia. For example, China just reported:

  • China enjoyed its largest trade surplus in almost five years in November, with exports surging an impressive 12.7% on a year-over-year basis. Exports to the U.S. jumped 17.7% and by 18.4% to the European Union.

  • Industrial production in November rose by 10%, following a 10.3% increase in October.
  • Chinese retail sales jumped by 13.7% in November compared to the s same period last year. That isn't a one-month aberration either; retails sales improved by 13.3% in October.

If you haven't added some Asian spice to your portfolio because you think it is too hard or too costly ... think again.

First, there are dozens of Asian ETFs to consider. For a full list, you can go to http://www.etfchannel.com/type/Asia-ETFs.

Secondly, there are HUNDREDS of Asian stocks — including Chinese, Japanese, Korean, Singaporean stocks &mdsah; that are listed on the NYSE and Nasdaq.

It is no more costly or difficult to buy shares of companies like China Mobile (CHL), China National Offshore Oil (CEO), Toyota (TM), Sony (SNE) and LG Electronics (LPL) than to buy shares of ExxonMobil, General Motors or Microsoft.

Unless you think that Asia is an economic wasteland, there's no reason why you shouldn't have a significant allocation to the fastest-growing region in the world.

Best wishes,

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Posted 12-26-2013 12:15 PM by Tony Sagami
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