All eyes are fixed on the FOMC meeting slated for Wednesday, Dec. 18, to settle the Fed tapering-on, taper-off debate for at least the next 30 days. So much has changed in the past 10 days in the way of investor perception of expectations for a Fed announcement of a reduction in monthly bond purchases that if they decide to wait until the first quarter, even January, the markets will very likely rally to new highs. Never a dull moment.
The latest fist-pump budget deal doesn’t even begin to address the debt ceiling issue that comes up for revision in early February, or entitlement reform as part of a grand tax overhaul compromise, which likely may not be addressed until after the mid-term elections. But assuming the debt ceiling issue comes and goes without a government shutdown, less politics translates to more bullishness for the markets.
In addition to the Fed decision, investors get to sift through a plethora of year-end economic data next week, from housing, industrial production, leading indicators and regional activity from the Philly Fed report. This pullback of the past few days has been healthy, but it might end up well for all of us as the market sells the rumor (possible tapering) and buys the news (the actual decision), making for a nice finish to an already strong year.
The “good news for the economy is bad news for the market” syndrome as been an uninterrupted pattern for most of the year and reflects an overhang of investor sentiment that remains joined at the hip with fiscal stimulus. With year-end capturing of gains and tax-loss selling hard at work, the final two weeks of December are sure to be characterized by wide price swings for the major averages.
While I’m not ready to establish hedges yet, I have talked about the importance of portfolio protection via inverse ETFs and I will sound the bell when it’s time to put on hedges.
In the meantime, into this volatility, I continue to position my Cash Machine and Extreme Income members into business development companies (BDCs) with floating rate loans, adjustable rate mortgages (like this stock), oil and gas MLPs, energy transport MLPs, covered call equity ETFs and convertible debt funds to continue to give us exposure to the most desirable places to generate high-yield income while maintaining our principal.