On the afternoon of Wednesday, November 20, the Federal Open Market Committee (FOMC) released the minutes from its October 29-30 meeting. I first want to address the trading activity that occurred in Wednesday’s session following the release.
As the end of 2013 quickly approaches, I urge all investors to understand that high frequency trading is currently the predominant driver of daily activity. In the final weeks of 2013, I suspect that predominance will unfortunately only increase. Therefore, it is not prudent to view the final few hours of Wednesday’s trading in which the S&P 500® Index (SPX) declined from 1790.68 to an intraday low of 1777.23, before closing at 1781.37, as a referendum on whether the much anticipated market correction is about to unfold.
Rather, please view the trading activity over the next few days, measure the volatility index, and pay proper respect to previously identified support levels before initiating any tactical reductions in exposure to risk assets. In regard to near-term SPX support levels (Figure 1), the intraday low of 1760.64 from November 13 provides an excellent point of reference.
As far as Wednesday’s FOMC minutes are concerned, I view much of the initial media commentary as too reactionary and not allowing for proper comprehension of the full, rather extensive, text of the October 29-30 minutes. Maybe I am getting old too quickly, but it took many hours last evening and again this morning to read the entire text, a laborious task that revealed no “new” message to the markets. What was contained within the minutes was consistent with recent economic data releases and consensus estimates for the initiation of tapering.
If there were one modest surprise it would that the Committee seems to favor an equal tapering approach to both mortgage-backed securities (MBS) and Treasury purchases. That differs from my previous view, and the consensus view, that any tapering would impact Treasuries only. Over the next few days I would watch the trading activity for MBS.
The consensus view, with which I agree, suggests tapering will begin at the March 18-19 FOMC meeting. The possibility does exist that if an extremely strong November payrolls report is released on Friday, December 6, tapering could begin at the December 17-18 meeting. However, by “strong” payroll report, I expect there would need to be a print north of 250,000 for both the headline and private figures. Otherwise, I suspect the FOMC waits for the calendar to flip to 2014.
I also maintain that any tapering will be initiated with a “take with one hand and give back with the other” approach. Yes, the Fed’s monthly purchases of MBS and Treasuries will be moderated, but expect both reassuring easy monetary policy language along with possible easy monetary policy initiatives to accompany the tapering. Whether it is lowering the unemployment rate outcome-based guidance or reducing the interest rate paid on excess reserves, some supportive conditions will be attached to the initiation of tapering.
There is so much suspicion regarding the now four-and-a-half year plus appreciation in the SPX. Not a day goes by that the “bubble” banter doesn’t permeate the financial media airwaves. Can there really be a bubble when so many are so suspicious that one exists? While rather obvious that the SPX could be vulnerable to a near-term correction, I urge true investors to allow the price action of the market over a several day period to confirm its occurrence. Being guided by a few hours of immediate release trading dominated by computers will only diminish returns over the long run.
Figure 1 S&P 500 Index (SPX), with arrow drawn to 1760 near-term support