For those that didn’t know, the Federal Reserve has been purchasing approximately $120 Billion per month in assets to stimulate the economy.
The markets are all about supply and demand, so any changes to this constant in-flow is something to pay attention to.
Multiple Federal Reserve officials have eluded to what’s called “tapering” over the coming months, meaning the incremental reduction of asset purchases.
Tapering discussions are expected to start this month and tapering could begin as early as December this year.
How Federal Reserve Tapering Can Impact Investors
One of the most important things to remember about the stock market is this:
The stock market tends to function in an anticipatory manner.
What this means is, the market may actually start to sell-off before the Federal Reserve actually begins implementing tapering measures.
Depending on how one looks at this, now could be a time to either “book profits”, identify new positions to start, or current positions to add to as the sell-off materializes.
Making these decisions can be tricky, which is why I always tell clients to make sure they are crystal clear about not just their high-level investment objectives, but their objectives for each individual investment.
Another thing to keep in mind is how the tapering impact plays in conjunction with other macro-level initiatives taking place right now, such as the G-7’s global minimum corporate taxation initiative and the rollback of Trump’s tax cuts.
More taxation rarely leads to higher internal corporate investment or job creation (which later impacts consumer spending).
In general, taxation is a headwind to growth. But greedy governments don’t care about that, especially when the people making those decisions are spending up to $100K per month of taxpayer funds on private jet flights alone. Whether or not the economy grows is irrelevant, their budget is locked-in.
The Federal Reserve tapering along with these two taxation initiatives can work in conjunction to put pressure on investment gains.
However, the good news is we can still make gains in a gain-restrictive-policy environment.
For example, there were more Unicorns (companies achieving $1B+ valuation) last year than ever before, where small investments (sometimes as little as $250) have produced millions (or billions in some cases) in profits for investors.
All you need is a proven system for identifying and capitalizing on promising opportunities – and you can thrive instead of dive.
Blessings.
J. Patrick
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