A Rising Tide Lifts All Boats

That’s the saying I hear attributed to the Federal Reserve’s unprecedented stimulus program and its effect on equities. “A rising tide lifts all boats.”

Well, more than 80% of S&P 500 stocks closed 2013 higher. And many say this is simply because the Fed has flooded the market with liquidity, effectively washing out the differences between individual companies and their stocks.

“Buy them all… as long as Bernanke’s foot is on the gas,” was the prevailing sentiment until late last year.

But now that the Fed is tapering, we can update that saying to the following:  “A falling tide floats only the boats with shallow hulls.”

As the Fed unwinds its bond-buying programs, investors will be spurred to reexamine their portfolio holdings and determine the winners and losers of the Fed’s withdrawal.

Here’s a chart showing the performance of the S&P 500 and 24 industry groups. I’ve measured percentage changes starting on December 18, 2013… just after the Fed first announced it would taper purchases by $10 billion a month.

See larger image

As you can see, the S&P 500 is up (albeit a mere 0.7%)… and there are clearly winners and losers.

Absent the “rising tide” effect of the Fed’s stimulus, investors will have the opportunity to play both sides of the market. This means buying good stocks and selling bad ones.

It also means that divergences between global equity markets are likely to widen. While emerging-market stocks have shown signs of weakness in fits and starts over the past three years, the worst of the sell-off was sparked in mid-December, on the taper news.

The iShares MSCI Emerging Market ETF (NYSE: EEM) is down nearly 9% since December 18, while a measure of European stocks — the Vanguard FTSE Europe ETF (NYSE: VGK) — has rallied more than 4%.

Looking ahead, we’ll do well to stop thinking about “the market” as if it were one, homogenous glob of investments that all move in the same direction.

Instead, start thinking like a stock-picker.

2014 will be a year of volatility and growing divergences between the strongest and weakest investments in this new, sans-stimulus environment.

And don’t worry, I’ll hold your hand along the way.

Sign up for Boom & Bust to gain access to my portfolio of recommendations (on both the long and short sides).

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In our new infographic What Killed the Middle Class?, we take a look at some shocking numbers to show how bad it’s become and what has been fueling this middle-class revolt.

 

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Categories: Central Banks

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.