Wednesday’s Federal Reserve meeting was a bit of a shocker to the markets. Since the summer, it appeared that the Fed had laid the groundwork for the reduction of asset purchases, and the market certainly expected something like that coming into yesterday’s meeting. When Ben Bernanke declined to taper purchases — and took a dovish tone in the press conference that ensued — markets made immediate adjustments. By the end of the day, stocks were up big, as were bonds; but the U.S. dollar hated the thought of the Fed keeping its foot on the gas pedal.
This move may force adjustments in certain portfolio positions. Our overweight to U.S. dollar position is being reexamined in the context of a looser Federal Reserve outlook and a major trend line that broke yesterday. Currency positioning runs through our overall international allocations, as well as our fixed income positioning. An easing in Fed tightening expectations also produced a bond rally, and we may take the opportunity to use a counter trend rally in bonds as a way to further reduce our interest rate exposure in the fixed income portion of our portfolios. While bonds are overdue for a relief rally, the recent pickup in leading indicators will likely make the rally short lived.
Yesterday was a surprise for most market participants and the facts of the game changed without much warning or notice. Now comes the hard part: Over the next few days, we’ll reassess what this deferral of bond tapering means for our portfolios.
