This week the Federal Reserve gave the market exactly what it wanted by electing to forgo tapering its asset purchase program in favor of continued quantitative easing.
This sent stocks, bonds, and commodities soaring as the headline was quickly absorbed by the investing public. The SPDR S&P 500 ETF (SPY) quickly climbed to new all-time highs, while the iShares 20+ Treasury Bond ETF (TLT) and SPDR Gold Shares ETF (GLD) each had one of their best days of the year.
It never ceases to amaze me how swiftly the move comes right when the news hits the wires. According to Bespoke Investment Group, two-thirds of the move in the S&P 500 Index was made in the first minute after the news was released. The wealth created in the span of a few moments is almost unfathomable. Although many are probably waking up today thinking “if the Fed didn’t taper, what does that really say about the fragile nature of our economy?”.
Ben Bernanke may ultimately be trying to push the S&P 500 Index to 2,000 before he exits stage left. Whether you agree with his policies or not, they have been effective at pushing asset prices to new heights and ushering in a new world of trillion dollar balance sheets, unlimited stimulus, and fear of monetary policy tightening. Eventually there will be a steep price to pay for these decisions, but for now the Fed is punting the ball down the field under the auspices of protecting the economic recovery.
The question now though is: Where do we go from here? Should you be putting new money to work in the market at the highs or ringing the cash register and checking out?
If there are two lessons’ I have learned over the last 6 years, they are: (1) Don’t fight the Fed and (2) Don’t fight the trend. Right now the long-term trend in stocks is still clearly intact and therefore I would not be aggressively selling positions to raise cash until we see a substantive change in the price action. There is no sense trying to pick a market top as long as stocks continue their winning ways. I’ve seen portfolio managers try to pick market tops and bottoms and it rarely works out well for them.