The Next Step--6/20/2013
Yesterday, Ben Bernanke put more certainty to the idea that the Fed is looking to remove the extraordinary amount of liquidity in the financial system. The buzz word associated with this is "tapering." The idea behind using this word is that the Fed is going to taper the amount of bonds it is purchasing in the market every month. Therefore the interest rates on these bonds will rise as there is lower demand for them, as the Fed steps away from their purchases.
As I've said previously, this is a good thing in the long-term as it means the economy is strengthening. In the short-term, the markets will be in a bit of turmoil as people readjust their investment portfolios.
However if we bear in mind the way markets move (see Understanding a Bull Market) , shorter-term pull backs and sell offs are common within the context of longer-term market moves. And I don't see this "tapering" as anything that will derail the longer-term Bull Market, which I believe we have been in since 2009. Like I said previously, the Fed is looking to do this because they believe the economy doesn't need these extraordinary measures to thrive.
Properly positioned portfolios should be sitting on cash right now and should be in the cat-bird seat for cherry picking good investments, if these markets do sell off.
Of note, one major theme that should emerge as the Fed tapers its purchases is a stronger dollar and, therefore, lower commodity prices in dollar terms.