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Federal Reserve Stimulus Explained

September 18th, 2014

With the stock market soaring to new heights, investors across the board are becoming nervous about how much room is left to run. Sitting right below 2,000, the S&P 500 is hovering around all-time highs without having any significant pullback in the recent months. This rising market is seen as a positive indicator general economy: however, it is important to notice what’s exactly driving the upward momentum.

 

For the past few years, the Federal Reserve has adopted an “easy” monetary policy. What this means is that the Fed has essentially been pumping money into the economy in ways such as buying back bonds and printing new money to eject into the economy. Also, the Fed has kept interest rates extremely low, which enables businesses to borrow money for little cost. This generates more business spending and overall investment, which, in turn, has helped push the market to new highs. The Fed’s actions have also been in the scope of investment professionals like Jason Trennert, the founder of Strategas Research Partners. According to the Wall Street Journal, Trennert says that,  “When the Fed plays such a strong role, you aren’t allowing the free markets to really assert their will. That makes any professional investors uneasy because it distorts markets, creating the stretched stock and bond valuations investors are dealing with today.”

 

As a whole, it is clear that the Fed has assisted the market’s gains over the past few years. However, the rule of what goes up must come down, should be taken into account these next few months.

 

It is a given that the Fed will have to eventually raise rates and start to tighten up its monetary policy. When this happens, businesses will no longer have the Fed to lean on, which could make investors nervous. This could begin to take profits off the table and further rebalance their portfolios. That being said, markets might be in for a volatile few months and even be prone to some losses.

 

Moving forward, it may be a smart move for investors to make cash available now to protect their portfolios against any downside in the future. Selling some positions now will not only protect against losses, but also free up some cash to re-enter the market at a better price.

 

In conclusion, it is crucial for investors to beware of what is going in the markets and make any necessary moves to protect their portfolio. Furthermore, investors must always take somewhat of a proactive approach when managing money.

 

No one can predict the future. However, those who stay disciplined and make precautionary moves who will be able to rough out the storm.

 

Editor’s Note: Information from the Wall Street Journal was used in this article.