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

The first warning shot across the bow of the markets from
the Fed came on Wednesday.  Fed Chair Bernanke appeared before Congress on
Wednesday and finally signaled that, depending on the data of course, the Fed
could start slowing the rate of QE.  The markets immediately reversed and
on Thursday the Japanese market, which has been on an absolute tear, fell
7%.  Whether or not this will lead to the long-awaited correction remains
to be seen.  The markets have been on a tear due in a large part to the
fear investors have of missing out.  That hasn’t gone away yet, but at the
same time the pace of the advance was becoming unsustainable (Japan has been an
extreme example) and a pause would do some good. Fundamentally the factors that
have been pushing the market up remain in place and so any pullback could
remain shallow.

Economic data continues to show modest growth with hopes of
increasing slowly as the year progresses.  The economy is getting to the end
of the deleveraging process and with the Fed’s tip of the hat, we have now
officially entered the mode that if the economic figures get stronger the Fed
will conversely reign in QE.  Overall, that is a good thing and long
overdue.  As I have said for some time it is unfortunate that just as the
economy starts to hit “escape velocity” the Fed will have to actually or
potentially pull back on QE.  That keeps economic growth in the slow
growth mode.  That’s the price of QE at the least and it’s a shame in my
opinion.  We would be better off if years ago we took more of the pain
upfront rather than shackling ourselves with the pains of unraveling QE now.

This was mostly a psychological move, a sort of trial
balloon, by the Fed to see how markets would react.  They will still be
providing massive amounts of QE and will be very slow in pulling back.
They will still risk inflation over letting the economy slip.  In a
practical sense their actions are nothing more than pushing on a string.
Markets are all about future expectations though and the beginning of the end
of QE could be upon us.  Going forward, the Fed will now have to play a
skilled balancing act in managing expectations about unwinding it massive
balance sheet.  No easy task to say the least.

Equities still remain the place to be but the easy money has
been made and it could now be a choppier ride going forward.

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.