There is a lot of lip service being paid to the stock market crash that we’re supposed to expect once the Federal Reserve starts raising rates.
Every time we get close to a regularly scheduled Federal Reserve statement, financial pundits pontificate about the nuances of what the Fed chair might say, not say, or imply.
It’s like clockwork.
But one theme remains constant: Any tightening of the Fed’s easy monetary policies will spell impending doom for the easy-money-addicted stock market.
The only problem, though, is that historical facts just don’t support the fear. In fact, there are opportunities for investment out there no matter what rates do…
A Powerful Lesson from the Recent Past
First, let’s rewind a moment to late 2013.
Just about every talking head in the financial media was sure that stocks were going to crater as soon as the Fed announced even a whiff of a taper in its bond-buying program.
And then the Fed began…
On December 18, 2013, it announced it would start to taper its aggressive bond-buying program to $75 billion a month beginning in January 2014 – and what happened?
The S&P 500 rallied to a then-record close of 1,810.65.
Oops, I guess traders forgot to listen to the talking heads.
And there was a good reason for that.
Traders are constantly taking in all available information and continually adjusting positions accordingly. So when the Fed announced initial plans to taper, the news had likely been priced into stocks for weeks – if not months.
And the fact that the taper was just $10 billion a month was a pleasant surprise.
Fast-forward to September 2014. The Fed closed its QE3-related bond-buying program – and the markets had gained 9.5% from the initial December 18, 2013, announcement.
Traders who swallowed the taper-tantrum red pill and moved to cash in December 2013 had a lot of catching up to do – and that means they are likely going to have to take on excessive risk to make up the difference.
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