ARBOR WEALTH: Low inflation, displaced turtles and downside protection

Published: Monday, June 24, 2013 at 05:22 PM.

A kind-hearted business owner toted him the final portion of his journey, relocating him to the adjoining Tops’l Nature Preserve that connects us to 30A.

No one wanted to see the turtle attempt to trundle across heavily-trafficked U.S. 98 between Tops’l and Sandestin. Once he was gently placed on the grassy slope that evolves into the state-owned, 8-mile forest, the reptile was on his own.

Like the turtle, we are currently being carried to temporary economic safety by the Fed, which is buying $85 billion of bonds monthly and holding down interest rates. When that economic life support program will cease and what will happen to our economy and to the market when the Fed scales back quantitative easing is a concern for all of us.

Chairman Bernanke has hinted that QE3 may be trimmed in the near future. And each time Bernanke floats that tentative suggestion, markets react negatively. Now it appears that quantitative easing may continue longer than expected due to recent reports of lower than expected inflation numbers. 

“Low inflation that ‘has surprised to the downside’ means the Federal Reserve can continue to ‘pursue its aggressive asset purchase program,” St. Louis Fed President James Bullard said in MarketWatch. "Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame. The Fed is publicly debating whether to start reducing the $85 billion of bond purchases it makes each month.”

Many economic experts expect a market pullback to follow when QE3 is phased out.  Equity markets have been fairly strong so far in 2013, and investors will likely be impacted when that happens.  Downside protection during such a selloff will be vital for many.

Of course, downside protection is often important to many retired investors and investors nearing retirement. Portfolios that rely on consumer staples, dividend payers and utilities will likely show less decline. 

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