In today’s Money Morning…FOMC minutes…don’t worry about the Fed…opportunities everywhere you look…the most-exciting Aussie companies…and more…
The FOMC minutes were released last night, and the hints they would begin tapering the US$120 billion a month of asset purchases before the end of this year saw equities nosedive.
We’ve seen this script play out before.
The game of cat and mouse between the US Fed and the market. The Fed sends out feelers to see how the market reacts to their hints of taking away the punch bowl. The market reacts by throwing all their toys out of the cot.
The Fed says, ‘There, there, I won’t take it away too fast and if you really spit the dummy there’s always more where that came from.’
The E-mini S&P 500 futures closed down 49 points at 4,388.50. A 1% sell-off in the market isn’t much to worry about.
The S&P 500 is now 2% below its all-time high. Big whoop.
But the fact is the biggest danger to the meteoric rise in US equities is the timing and size of the taper. We all know the reason why the market has gone vertical over the past year is because of the immense levels of stimulus from the Fed.
There are signs that the sharp bounce back in growth after the COVID shutdowns and government stimulus have run their course, and the next leg higher in growth is going to be harder to come by.
In the US, soft data is starting to roll over and hard data has been softening since the start of the year.
So the market is considering whether the Fed will be tapering into a cyclical slowdown.
That’s probably why US bonds rallied after the minutes were released, which sounds counterintuitive. If they are going to buy less than the current US$80 billion a month of treasuries the yield on them should go up, not down.
PS: We reveal four little-known small-cap stocks that cannot be ignored…Download your free report now.
Don’t worry about the Fed
Trying to put the jigsaw together by working out what the US Fed will do and how the market will react is seriously a fool’s errand. You will end up jumping at shadows and then kicking yourself later for making the wrong decision.
I have been observing the markets and the US Fed for about three decades. If you told me 20 years ago that rates would be at zero and the Fed would be buying US$120 billion of assets a month with printed money to keep the markets afloat, I would have laughed in your face.
But here we are.
I don’t want to join the throng of analysts trying to second-guess the Fed and predict what markets will do.
I’d prefer to focus on key sectors of the market with strong tailwinds over the next decade and hunt for companies that are prepared to ride the wave. Then I can ignore the daily gyrations in the indices and zero in on what is going to build wealth into the future no matter what the Fed does.
There are immense themes playing out right now that should be a part of your portfolio. It doesn’t need to be a large part of your portfolio to make a big difference.
We are all up to our eyeballs in the large-caps with our superannuation investments. Allocating a portion of your investments to small-caps makes sense from a diversification perspective.
You would be surprised how much difference you can make to overall performance by allocating some capital to higher-growth/higher-risk stocks. As long as you allocate only a small portion of funds to small-caps that you are willing to speculate with, if things don’t work out you haven’t done much damage to your overall portfolio returns, but if you hit a few homeruns your total return can skyrocket.
Opportunities everywhere you look
The monumental shift towards electric vehicles is gathering pace and will start to accelerate over the next few years. There’s already been a sharp rally in the obvious winners but that doesn’t mean the opportunity is over if you aren’t set yet.
Climate change issues will cause immense changes going forward and there will be plenty of winners and losers as a result. Environmental, social, and governance issues have reached a tipping point that is leading to opportunities.
We are racing towards 5G rollout, and the internet of things (IOT) which had a false start a few years ago, should start to build momentum. Artificial Intelligence applications are exploding and will continue to create efficiencies in business that will create immense wealth.
The relentless digitisation of our society is continuing to tear down barriers to entry to many industries and small-cap companies that succeed are rallying 1000s of percent, as we saw with Afterpay Ltd [ASX:APT]. A company that was tipped by Australian Small-Cap Investigator well before it became a market darling, leading to a 1,448% return for members of the service.
Medtech, regtech, fintech, edtech, realtech — they are all still in their infancy with huge TAMs (Total Addressable Market).
The most-exciting Aussie companies
My job is scouring the market for the companies I think can explode in value if things go their way. I’ve put together a report for you with seven stocks that I believe have a great future. I reckon you should read it, so you can see for yourself the amazing things that little Aussie companies are up to.
I’ll leave it for others to come up with interpretations of the cryptic messages coming out of the Fed. There are great opportunities out there if you are willing to step up. Just click right here and I’ll tell you more about seven of Australia’s most-exciting companies.
For Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here