MARKET CHOOSES TO PULL BACK ON FED TAPERING IN JAN AND EARLY FEB

February 10th, 2014 by Leonard

In my last Blog published Jan 15 “THE LONG SLOW WALK, UNWINDING DEFLATIONARY EXPECTATIONS”……A DIFFERENT GAME,  I did a little forecasting regarding how traders might react to the Jan 28 FOMC meeting and subsequent meetings into the year..

 

The “Measured Pace”

 

It basically boiled down to 2 words……”measured pace” . The Fed can do anything with those 2 words and that’s a good thing. My thought was that the Feds will adjust their tapering program to the pace of an economic recovery and measure it’s sustainability.

No one can say just how many waves of recovery it might take for the economy to actually grab hold of a trend. The market is a separate issue. It tends to cure itself.

Double click on chart to enlarge, Then the back button to reduce

ES Monthly Chart 02-10-14

Into The Future

 

The Fed plans on how their actions will affect the economy 6 months to a year out. They can’t be over steering or rapidly changing course on every positive or negative economic report.

 

Businesses may want to perk up as easy money becomes a little more expensive when interest rates eventually rise along with a stronger dollar.

 

The Self Correcting Bond Market

 

For now the Bond market is self correcting because some of the money pulled from the stock market gets stored there. When the market is ready to go up, the Bond cash returns to stocks slightly raising interest rates as Bonds fall. That’s a pretty good scenario for the Fed.

 

More Expectations

 

I would expect some passive investing to give way to growth. Intense speculation at each and every FOMC meeting should continue. The stock market could vacillate in a wide trading range with solid breaks leading to higher prices over time while the economy catches up to current valuations.Gold should lose it’s luster as a hedge.

 

The S&P should be the winner since it has been the laggard relative to NASDAQ over the last 5 years and who doesn’t like dividends?

 

The FOMC tapered to $75 Billion for January and to $65 Billion for Feb..

 

Old School Investing

 

“Old School Investing” (Bond rallies lowering interest rates, Dollar falling with Gold going up as the store of value) will continue to return whenever the economy recedes after a small growth period but it should only be temporary as the Feds continue to pull out it’s support. . The tug of war should be minor.

 

 

Bring it all together

 

I expect all of the above to happen barring any unexpected and horrific external events in 2014

 

Market valuations need to come down to meet the economy or the economy needs to rise up to meet market valuations (minus the Fed).

 

Perhaps a little of both will happen. The speed at which this happens is dependent on several factors including how fast Congress creates stimulus policies of growth.

 

Next FOMC meeting is on Wednesday March 19, 2014 at 14:00 EST

 

 

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