2014: What Will Happen Now?

What will happen now?  This is a vexing question on everyone’s mind.  Now that the Fed has signaled the end to at least the ultra easy money policy by systematically eliminating quantitative easing (QE), there are many questions on investor’s minds as to what will happen next.  Will the economy finally find it’s footing and take off?  Will that drive inflation and rates to new highs?  What will this do to the markets and real estate?  Are there any Black Swans out there lurking?

While it’s tough to have a crystal ball to figure out what will happen next, we can look at it from a risk/reward perspective.  Right now, with no major shocks to the markets in almost two years, many hedge fund managers are calling for one to happen in the near future.  But, most people do not think that will kill the bull market.  I tend to be in this camp.  Every once in a while, the market needs a new shock to wash out the weak buyers.  Also, higher rates, in and of themselves, do not kill bull markets either.  While this changes the perspective of many investors and the choices they make, a steady, gradual increase in rates should not choke off growth in the economy.

The most vexing question is whether the Fed’s ultra easy-money policy has created a Black Swan somewhere that we haven’t seen yet.  This could very well be the case.  As we saw in the summer of 2013, easy money excesses caused even the slightest ripple in interest rates to make enormous moves in currencies and emerging market stocks.  Unfortunately, without that crystal ball, it could be in any number of areas, including those emerging markets, high-yield debt, or our old friend, real estate.  So, hold onto your seats, it’s about to get interesting.

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