Investing Despite the Taper


As investors celebrate the fifth anniversary of the bull market, they must give thanks to our Federal Reserve.  Its unprecedented monetary support has been an important factor in the market recovery.

To fight the most vicious downturn since the 1930s, the Federal Reserve slashed short term interest rates to near zero and forced longer term rates to the lowest since World War II.  It gobbled up longer dated Treasuries and mortgage backed bonds, to the point where its balance sheet is burdened by some $4 trillion in debt.  Investors have shifted billions from bonds to stocks as yields plummeted. Corporations bought back their shares by borrowing at the low rates.

Investors cheered Fed induced improvements in the economy.  Lower mortgage rates staunched the slide in home prices, as buying became cheaper than renting. Waves of mortgage refinancing put more money in Main Street pockets, boosting spending.

However, the Federal Reserve has started to take the punch bowl away, reversing its liberal monetary policy.  In December, it started reducing (tapering) by $10 billion per month its bond buying program; short term rates are poised to rise in 2015.  

Given the powerful impetus the Fed’s expansionary policy provided, just how should investors play the great coming contraction in liquidity, with a corresponding rise in interest rates?

In a Nutshell

There’s no way you can spin the tapering as a positive for stocks.  Higher interest rates reduce their present value, including their dividends. Higher yielding bonds create greater competition for equities.

The great rationalization is that the Fed wouldn’t taper if it didn’t feel the economy had improved; better economic conditions lead to superior profits which lead to higher stock prices.  Longer term we’re optimistic.  The stock market will remain a cornerstone for portfolios.  Even if rates rise, they’re still at very low levels.  A 3.5% ten year Treasury is still not enough for retirees to live on, endowments to distribute, or pensions to rely upon.

Different companies will react differently to a tightening in monetary conditions.  More cyclical companies will benefit more from the improving economic conditions giving rise to the tapering.  Valuations still matter.  Even non-cyclical stocks can perform well if the tapering proves less damaging than has already been priced in.

Before getting too alarmed over the taper, realize that the future is never certain.  Fed Chair Janet Yellen has repeatedly stated that monetary policy is flexible; if the economy slows or stumbles there’s nothing to prevent the Fed from halting or even reversing the taper.

A portfolio’s first job is to preserve capital.  Even if you’re committed to restructuring your portfolio to compensate for the taper, stay diversified enough to cope with no taper, or even an expansion in liquidity.

In a taper, financial stocks’ earnings should rise with higher rates.  Their business is lending money, so when rates rise the yields on their loans and investments should improve, padding the bottom line.

If the Fed doesn’t taper, and money velocity picks up, all the Fed’s monetary creation can trigger inflation.  If that velocity picks up faster than the Fed can or wants to taper, inflation may result.

Investments that hedge that risk could be a good bet now.  Chair Yellen and many others see inflation as quiet.  While that’s true, the good news from an investor’s point of view is that the cost of inflation insurance is cheap.  Commodity producing stocks are desirable inflation hedges.  

The Federal Reserve is confident the economy can withstand the taper because it is growing fast enough to tolerate higher interest rates.  One strategy to offset the taper is to focus on those companies that most benefit from a growing economy.  Cyclical stocks’ earnings vary with the economy, like home builders, auto makers, appliance outfits, and other makers of big ticket items.  

However, shunning non-cyclical stocks, such as utilities, consumer staples, and telecoms, merely because their earnings are less sensitive to economic variability, may be an error.  Why?  Investing isn’t just about predicting future earnings; it’s also factoring in how other investors have handicapped those earnings, and considering whether the resulting valuations make sense.

Note: David G. Dietze, JD, CFA, CFP™ is President and Chief Investment Strategist of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Avenue, Summit.  The full-length version of this article is available at:

The opinions expressed herein are the writer's alone, and do not reflect the opinions of or anyone who works for is not responsible for the accuracy of any of the information supplied by the writer.

TAP Into Another Town's News:

Sign Up for E-News


Upcoming Events


Thu, July 19, 12:00 PM

Madison YMCA, Madison

Free Childhood Nutrition Seminar at the F.M.

Fri, August 10, 6:00 PM

Museum of Early Trades and Crafts, Madison

Downtown Concert Series: Mama D & The Vexations

Arts & Entertainment


Sun, September 30, 8:00 AM

College of Saint Elizabeth, Morristown

Walk to Fight Alzheimer's

Giving Back Health & Wellness

A Week at the Library of The Chathams Monday, July 9 – Sunday, July 15, 2018

Please note that the library will be closed on Sundays now through Labor Day weekend


Our summer program is in full swing.  This week we are starting some of our most popular children’s programs, Chess for Kids and sewing classes with Miss Polly.  Children will also enjoy a visit from a special guest, Queen Maria Isabella from Medieval Times.  Teens ...

Longtime Chatham Resident Passes the Torch to Current Residents

July 13, 2018

To the Editor,

I moved to Chatham from Ohio in 1961 and left just over a year or so ago. My daughters went through the school system and one of them still lives there with her son.

Clearly, we found the Library and local educational opportunities to our liking. 

When it came to giving back to the community, I chose to support the Library and served as a Board member for 15 ...


AtlantiCast: Episode 18

On this week’s AtlantiCast, you’ll find out how accessing care at Atlantic Health System is now easier, more affordable and closer to home than ever, learn which item from the produce aisle could be the newest weapon against cancer, see what Atlantic Health System, the New York Times and Instagram all have in common and much more.



Video: Point View's Petrides Talks Netflix's Cash Burn as Company Reports Earnings

July 16, 2018

Point View Wealth Management's Managing Director and Portfolio Manager, John Petrides, live on discussing Netflix's earnings report and why the streaming service should dilute shareholders to plug its cash burn.

​​​​​​For more than 25 years, Point View Wealth Management, Inc. has been ...

5 Simple Ways to Save Water this Summer

According to the L.A. Times, the average American uses an estimated 98 gallons of water EACH day.  

Here are five simple ways you can save water, to help you conserve water this summer and take some pressure off of your drains.

1. Unless you are using it, turn the faucet off. How many of us still leave the water running while we shave or brush our teeth?According to ...