Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

The markets have been fretting over “taper talk” for the
last few weeks culminating with Wednesday’s Fed announcement.  The initial
printed release from the Fed had little talk of change but his later remarks
and Q&A revealed that the Fed indeed is set to end QE by mid-2014.
Depending on conditions of course – as the Fed would want me to say.
Bonds and stocks both fell as a result.  Bonds, along with anything
interest rate sensitive, have been crushed over the last four to six weeks.
We have been warning about these type of events to bond investors for a long
time.  The paltry yields offered in the marketplace offer little
protection against capital losses being experienced.  The tailwind enjoyed
by bonds for thirty years has shifted to a headwind.

We will have to see how the market reacts now that it knows
what the Fed’s game plan is.  Bears have been waiting for a correction and
they will try to use this as a shot to take the market lower.  Eventually
the perverse “bad economic data is good for the markets” mentality that has
prevailed in the short-term will fade as we are weaned off QE.  The
economy is strong enough to start reducing QE and it’s about time to start
pulling it back in.  The very slight marginal benefits of QE in the
short-term are dwarfed by the long-term risks of maintaining the program.

So what to do now?  We welcome market volatility in
that it creates opportunity and sets the stage for future returns.  We
sold our high yield bonds at the beginning of May as the prices had been
getting too rich.  We have been avoiding interest rate risk in our
portfolios for some time and have held higher than normal cash positions to
take advantage of market adjustments.  The cyclical sectors offer more
value at this point than the defensive sectors that had been bid up far too
high.

Although
we are bearish on bonds longer-term, in the short-term the markets are jumping
the gun and overreacting to Fed policy. This is just the initial move.
The reversal in Fed policy will be very gradual and a process.
We are seeing opportunities in certain income producing assets that are
being sold off indiscriminately along with everything else in the sector.
In regards to stocks, although we still like equities the easy money has been
made and the ride will be a bit bumpier going forward.  This type of
environment requires keeping your eyes on the road and an experienced manager
to help navigate.  The autopilot has worked great for a while with the tailwind
but it’s now time to turn it off in face of the headwind.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.