How You Can Profit from the Fed’s Decision to Taper

[Marriner S. Eccles Federal Reserve Board Building]

The Fed did it. It finally pulled the trigger on a taper of its $85-billion-per-month bond-buying program. Although the taper won’t begin until 2014, the early sign from Wall Street is that traders love the decision.

Stocks vaulted some 200-plus Dow points about 30 minutes after the Fed’s 2 p.m. EST announcement today largely due to two main factors. The first, and by far the most important, was the removal of uncertainty about what would happen with the taper and when it would begin. That’s a far cry from the Fed’s meeting in September, when everyone was expecting a taper announcement such as we had today but no such announcement occurred.

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The second factor driving stocks higher is the message the Fed sent on the fed funds rate. That rate now is likely to remain at near-zero levels well into 2015 and beyond. Moreover, the Fed suggested that even if the unemployment rate was to come down to target levels of 6.5%, that wouldn’t mean rates would rise automatically. The translation is that the Fed still very much has Wall Street’s back, and that’s why the bulls are rejoicing.

Here’s the money quote directly from today’s FOMC announcement:

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

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In addition to domestic equities rising, we also saw a big reversal in the value of international stocks and, in particular, emerging market stocks. The iShares MSCI Emerging Markets (EEM) was up 1.3% after the Fed’s decision. That jump is a good sign for those who are looking for areas in the market that represent value vs. domestic stocks.

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While I certainly am encouraged by the market’s reaction to the Fed, I think we’ll have to see how things shake out before we can make any big investment decisions going forward.

Will the removal of Fed uncertainty continue to be a driver of stocks in 2014, and will the economy continue improving such that the Fed can implement its taper plans? We’ll start to find out after 2014 begins. Until then, expect to see volatility in stocks, as buyers are countered by sellers looking to lock in 2013 trading gains.

Paths are Made by Walking

“Travelers, there is no path, paths are made by walking.”

–Antonio Machado

The Spanish poet reminds us that it’s up to each of us to blaze our own trail, and to create our own paths in life. Forget what others want you to do. Do what you want to do in life, and walk your own path. It’s the only way to be truly happy.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

Exclusive  Advice from Warren Buffett's Partner, Charlie Munger

In case you missed it, I encourage you to read my e-letter article from last week about where to look for investment opportunities in 2014. I also invite you to comment about my column in the space provided below.

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After the Federal Reserve announced it would trim its monthly stimulus starting in January, U.S. stocks surged, sending both the S&P 500 and the Dow to record high closes.

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