It's time to start thinking ahead. This fall, many on Wall Street have been thinking day-to-day–at most week-to-week–as we puzzle out what's happening in the near-term with Washington D.C. and the Fed. But now that we've reached a period of relative calm, it's time that Wall Street face the music.
The days of the Federal Reserve's easy money policy are drawing to a close and that's going to have big—potentially disastrous—implications for the markets. It may not happen tomorrow or next week, but as I'll discuss shortly, it's all too likely that this will impact our investments next year.
This Fed policy gave Corporate America the green light to rush to the bond market and borrow at ultra-low rates and put the cash towards aggressive stock buyback programs or dividend increases. And this corporate buyback frenzy has persisted as long as the Fed has kept up its end of the bargain.
As you probably know firsthand, stock buyback programs and dividend increases are great for shareholders. So many investors have banked on the continuation of the Fed's zero-interest rate policy. If you consider yourself one of those investors, I have bad news for you: Things are going to change very quickly in the next few months, and not for the better.
In fact, the Federal Reserve recently stated that it could start to cut back on bond purchases by the end of the year–and end them altogether in 2014! And now that the unemployment rate fell to 7.2% in September, we are drawing ever closer to the 6.5% benchmark rate that signals to the Fed when it's time to pull the plug.
So if you don't act quickly, you could be caught holding the bag when the Fed announces the definitive end to Quantitative Easing (most likely in 2014).
What Will Happen If QE Ends in 2014?
If QE ends definitively, it will make all high-dividend stocks more volatile, especially mortgage REITs. What I expect would happen is that an initial shock-wave would hit Wall Street. The kneejerk reactions we've seen to past Fed announcements will pale in comparison to the post-QE pullback. But that doesn't mean you have to get caught up in the panic. You still have a choice to make.
Option #1 is to resign yourself to the market's obsession and get caught up in the selling action that will inevitably result from the end of QE.
Option #2 is to plan ahead for what's to come in 2014: A flight to quality.
I'm sticking with the second option and I recommend you do the same. Much of 2013 belonged to the crap, if you'll pardon my language; the coming year should belong to the quality. Believe it or not, the best performing stocks in the first half of the year were in the bottom 10% of market capitalization (i.e., micro caps), with the lowest dividend yields (essentially 0%), the most negative analyst earnings revisions (bottom 10%) and the highest short interest (top 10%).
That can't last. The biggest winners from the better part of 2013 profited from a tremendous "short squeeze" that propelled many thinly-traded stocks higher as wave-after-wave of money flowing into index funds and ETFs caused the shorts to cover their positions, which increases institutional buying pressure. Whenever low-quality stocks lead the way and a "crap rally" occurs, the stock market historically reverses itself and a flight to quality ensues, typically within seven months.
The time for that flight to quality is approaching, so there's no time to waste. I've been running my proprietary screening tool on full blast to try to isolate the best Bernanke-proof stocks around and I've isolated ten such names. No matter how choppy the market gets in 2014, I fully expect these stocks to benefit from the impending flight to quality. While many are tossing and turning at night, worried about how the Fed's latest machinations will impact their nest eggs, the fortune few who invest in these 10 stocks will enjoy sleep-well-at-night safety.
Of course, buying is only half of the battle. With this kind of volatility on the horizon, you'll need to go over your existing positions with a fine tooth comb. Checkout 25 of the biggest names on Wall Street that you must sell now.