Easing does it

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The Truth About the Fed and Your Investments

Uncertainty over U.S. monetary policy has roiled markets recently, since the stimulus measures taken by the Federal Reserve have undoubtedly created a huge stimulus for stocks, too. And that focus on the Fed will continue this week as Bernanke & Co. wrap up meetings on Wednesday.

But the good news is that despite the choppy market as of late and the huge importance ascribed to the next year or so of Federal Reserve policy, investors are almost certainly going to come out ahead.

You might think this is batty, since quantitative easing and near-zero interest rates have spurred a roughly 140% rally since the March 2009 lows — and the logical conclusion is that the end of these policies means the end of the rally.

However, many market watchers insist that the end of stimulus measures are bullish for stocks, not bearish. The simple reason is that an artificial rally based on QE can’t last … and that tighter policy at the Federal Reserve implies confidence in a sustainable recovery that doesn’t need Bernanke pumping it up.

Sounds like malarkey, right? Stocks rallied dramatically three or four years ago because the Fed was throwing money around, but stocks are expected to rally going forward because the Fed is not throwing money around.

But don’t take my word for it. Here are some Wall Street experts, as quoted in a recent Bloomberg article:

“You have to remember why they’re doing this, because they think the economy is in a self-sustaining phase, which ultimately is good for profits, which is good for stocks.”

“Corporate earnings have really been the drivers of higher stock prices up to this point, and if we anticipate economic growth then the market can continue to do well.”

“The Fed is clearly going to wait and gauge the sustainability of the economic recovery. And the improving economic growth signs outweigh the monetary tightening impact. That will likely be the case this time.”

In other words, the fact we are getting back to the fundamentals of the economy and the profits behind stocks is a good thing.

This is echoed by Fed insider Jon Hilsenrath of the Wall Street Journal in a recent article that contends growth outlooks are much more important than any Fedspeak about tapering or rates. To wit: If growth looks good, the Federal Reserve might hint at tightening — and the prospect of growth and recovery is the really important part for investors.

This is not to say there aren’t risks.

Continued infighting in Washington over federal spending could roil the markets, with implications for the U.S. dollar or employment thanks to more public-sector layoffs or consumer spending reductions should we see program cuts or tax increases.

And, of course, Bernanke could be dead-wrong even if he predicts an economic recovery that will accommodate tighter monetary policy. Let’s not forget that in 2007, Big Ben famously said, “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

Oops.

But bigger-picture, investors need to look beyond the implications of past policy and stop moralizing about Helicopter Ben and QE Infinity.

The most important thing from here on out is growth, plain and simple.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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