Stock Market News: When the Fed Ends its Bond Buying Program, Invest in Cash Reserves


Over the past couple years, the stock market has been on a hot streak, like a conference attendee at a Las Vegas roulette table.

But, things are beginning to wobble. We're reaching a tipping point where the Federal Reserve is starting to extricate itself from the markets, while the economy is still getting going. With it, the potential for a stock market correction is rising and now would be a good time to start moving some funds into cash.

The equity market has been on a tear, while many economic indicators are still hit or miss. In early 2009, the Dow Jones was at 6,627 and has almost doubled since then, to an all-time high. The same pattern holds for the S&P 500. But, unemployment benefits, manufacturing indices (particularly the ISM Manufacturing Index), etc. are still up and down.

While a lot of the growth in equities is due to generally improving fundamentals, it's also due to enthusiasm and, to a significant degree, the Federal Reserve’s stimulus efforts, which have kept bond yields down and encouraged money to move into equities, in effect inflating the market.

As the Fed winds down its stimulus efforts, the price of stocks will likely fall. The Fed will continue to reinvest maturing debt even after it ends its $85 billion-a-month bond-buying program (possibly as early as this Summer), in order to calm the markets, but it's hard to think such a large move won't have a significant effect. Uri Landesman, who oversees $1.2 billion at the New York investment firm Platinum Partners, told Reuters, the stock market has been "insanely" inflated by the Fed's policies.

A safe bet would be to move some money out of stocks and hold it as cash, in case it doesn't go as smoothly as Federal Reserve Chairman Ben Bernanke hopes. That way, you'll be better positioned to make new buys after a handful or so of percentage points are knocked off the major indices.

But ... investing in the market is still kind of like walking up to the table and putting your money on black. We’ll see how if it plays out.