Don’t Be Fooled By Wall Street Handwringing Over The Fed
The financial news media is reporting today that many on Wall Street are worried the Fed might begin tapering its bond purchases in December. The stories say these concerns prompted yesterday’s market drop. And they imply these concerns could lead to further selling over the weeks ahead.
My message to you… don’t believe the fear mongering.
Yes, the S&P 500 and the Dow Jones Industrials both moved lower in yesterday’s trade. But a 0.1% drop in the S&P 500 and a 0.4% decline in the Dow Jones Industrials is hardly reason to panic.
The market doesn’t climb higher in a straight line. Just take a look at a 2-year weekly chart of the S&P 500. You’ll see the market climbs for several weeks and then it pulls back for a few weeks.
However, the longer-term trend is an upward one.
You have to keep in mind that the financial news media is inherently focused on the extreme short-term timeframe. After all, it’s their job to report what happens in the market on a daily basis. And to keep readers interested, they have to come up with explanations for the market’s every move.
Of course, one of the most popular explanations for the day-to-day swings this year has been the Fed. Almost every week you’ll find stories attributing the market’s fluctuations to investor views about when the Fed will begin tapering its bond purchases.
Now, don’t get me wrong… I fully expect the Fed to begin tapering in the near future.
But it doesn’t appear very likely that tapering will begin in December.
Just last month, the Fed reiterated its commitment to maintaining stimulus until unemployment falls below 6.5% as long as inflation remains below 2%. And based on the October data, we’ve still got a ways to go before those targets are met.
While employers added a better than expected 204,000 jobs last month, the unemployment rate increased from 7.2% to 7.3%. And with the personal consumption expenditures index rising just 0.9% in October, inflation continues to lag the Fed’s inflation target by a wide margin.
What’s more, it’s highly unlikely the Fed will make any policy changes before Fed Chairman Ben Bernanke retires at the end of this year.
Barring a stunning change in the data, Mr. Bernanke will probably leave the decision for his successor. In fact, this widely held view is the main reason why so many economists don’t expect the Fed to make any policy changes until the first quarter of 2014 at the earliest.
There’s no question that we are nearing the end of the latest round of quantitative easing. But based on the economic data and the coming leadership change at the Fed, I disagree with the Wall Street Chicken Littles who think the Fed will start tapering in December.
Profitably Yours,
Robert Morris
Category: Breaking News
