Equities Shouldn’t Fear Fed Taper


It’s been two weeks since Federal Reserve Chairman Ben Bernanke announced on June 19 that the FOMC anticipates softening its unprecedented stimulus program, and hinted at plans to scale back its $85 billion-a-month bond purchases, with scheduled purchases likely coming to an end by the middle of 2014. Mr. Bernanke emphasized that any decision to adjust the rate of asset purchases would require continued improvement in the economy's performance and a further decline in the unemployment rate.

Financial markets initially recoiled in response to the news. Fixed income rates jumped, while stocks fell from their highs. For the week ended June 21, the S&P 500® Index posted its worst week since April. Since then, stocks have begun to rebound from their 5% pullback, recovering some of their fresh losses, and offering a break from the recent sell-off. By Thursday, June 26, various central bank officials had made public comments in an attempt to assuage investor fears of imminent policy tightening, and the markets rebounded even further. Investors are clearly growing more comfortable with the idea that a scale back in Fed stimulus will not result in an economic Armageddon.

We view the potential stimulus taper as bullish and a sign of a stronger economy. Evidence of improvement continues to mount, including recent better-than-expected jobs data, durable goods orders, consumer confidence, new home sales, and home prices. Quantitative easing has to end at some point, and the taper should not be viewed as a change in monetary policy. In fact, the Fed’s announcement should be received as good news, as it gives us greater clarity about the central bank’s schedule for ceasing a policy that is too expensive to maintain much longer, and too extreme for the prolonged economic improvement we are experiencing.

We do not expect the latest taper talk will be disruptive to the longer term performance of equity markets, as long as we continue to see robust profit gains from earnings reports and further signs of economic growth. For months, the markets have moved sharply in response to any word of Fed policy, but the sell-offs have not been sustained as evidenced by the rebounds that followed. Once the current uncertainty passes, we believe the market could move even higher. Other reasons to remain bullish on stocks are continued job growth, an improving housing sector, high growth potential in energy, and a manufacturing sector verging on recovery.

Past performance is not a guarantee of future results.

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