For long-term investors, this week’s amazing equity volatility is little more than a distraction. But the moves we’ve seen in the last few days shouldn’t be shrugged off: they are indicative of a market that is facing a host of new fundamentals.
Serious investors should pay heed to the following:
1) It’s Over for the Fed
As evidenced by Thursday’s reversal, the days when the Fed can end a market decline with a few choice words are over. Sure, they can dictate short-term rates, but long-term rates are set in the marketplace.
As I said in my third quarter commentary, a steepening yield curve—higher long-term rates and low short-term rates—is inevitable.
Banks should be the biggest beneficiaries, so an allocation switch to large cap value is in order.
2) The Dollar Will Keep Appreciating
The U.S. economy is outpacing the rest of the world. A natural result is a stronger greenback. Companies that use their buying power to purchase cheap goods overseas, and sell them here, should do well. Large retailers like Walmart (WMT) make a lot of sense here.
3) The U.S. Recovery Is for Real
The economy is hitting on all cylinders, and lower energy prices will just add to the momentum.
Start thinking now about where to add equity exposure if this sell-off gets any more interesting. Having a executable plan is essential for those wanting to take advantage of market volatility.
See Ben Warwick’s latest commentary for ThinkAdvisor, Global Realities Won’t Overcome Investor Complacency: Searching for Alpha for October 2014.