Patty T. from Baton Rouge, LA asks: Hello Mitch, there seems to be a lot of news about when the Federal Reserve will start pulling back some of their support for the economy. Do you see this timing as a big deal, and something to watch? How might it affect the markets?
Mitch’s Response:
Thanks for your question, Patty. Financial news these days seems to focus overwhelmingly on inflation worries and the Federal Reserve’s potential response. Before giving you my thoughts on this issue and your question, I think there is something very key to note: the more the media fixates on a story/fear and the more widely discussed it becomes, the less pricing power it ultimately has on markets, in my view.
On the issue of inflation and Fed tightening (tapering), I see the story as so widely known and discussed that I think they lack real pricing power at this stage. The concern already outweighs the risk.
There is also not a lot of historical evidence supporting the conclusion that Fed tapering will lead to an economic downturn or bear market. For readers who don’t know, Fed tapering refers to lowering and eventually ending the $120 billion per month in bond buying. For one, Fed bond buying is a relatively new tool for monetary support. The aftermath of the 2008 Global Financial Crisis was the first time it was deployed.1
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So, we’re really only talking about one data point linking Fed tapering to economic and market performance. As it were, that data point is positive: when the Fed first announced a “taper” in May 2013 to the end of the taper in October 2014, the S&P 500 went up by over +20%. The Fed starting raising rates in 2015, and the market still kept going up. Volatility? Sure. But bear market and recession? Didn’t happen.
I am not too worried about Fed tapering or language implying Fed tightening. The market has plenty of time to adjust, and history shows the effects are not as deleterious as many suggest. I even see a silver lining in Fed tapering, whenever that day arrives. In my view, if the Fed pulls back and eventually ends the practice of buying bonds, it will put some upward pressure on the longer-term interest rates, i.e., the long end of the yield curve. A steeper yield curve is good for the economy and stocks, in my view. Don’t fear a Fed taper, embrace it.
In the meantime, I expect the financial media coverage to stay focused on the Fed and inflation issue, and there will likely be no end to speculation over when the Fed will start tightening. My advice: tune it out. Stocks and the economy can do just fine without $120 billion per month in bond purchases.
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