Expect relatively big short-term shifts among markets and assets as traders try to keep cheap money at work toward maximizing rewards while limiting risks, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Was last week's rally—you remember Wednesday and Thursday, right?—on the surprise no taper decision from the Federal Reserve, a sign that stocks are headed even higher from here or an indication of an increasingly nervous and volatile market?
I'd vote from the latter.
Think about this indicator: A decision to put off a cut of what was probably no more than $10 billion to $15 billion a month in Fed purchases of Treasurys and mortgage-backed securities was enough to drive the Standard & Poor's 500 Index (SPX) to a new all-time high.
That's clearly an overreaction, unless global financial markets see the Fed's decision on when to taper its purchases as a marker for the end of cheap money. I think the logic goes something like this: As long as the Fed doesn't taper at all, the moment when the central bank decides to start to raise short-term rates is postponed. When the Fed does start to taper, even if rising short-term rates aren't on the immediate agenda, they do go on the calendar.
In other words, the big rally last week was a relief rally and global markets are starting to make a transition, from certainty that US short-term interest rates will remain at 0% to 0.25%, to a period of worry about exactly when interest rates will start to climb.
If this isn't the end-game for cheap money, we've moved closer to that end-game and that means more volatility and more exaggerated market moves.
Globally, money is still cheap. Short-term benchmark rates are effectively 0% in the United States and Japan. It pays to borrow at low rates and put the money to work. It doesn't pay to keep money on the sidelines, since cash and cash alternatives pay almost nothing. Traders and investors who look down the road into 2014 or 2015 can see this environment coming to an end: The Fed has said it will keep short-term rates at their current extraordinarily low level until 2015, but doubts are starting to creep into the collective mind we call the market. There's not an endless amount of time to waste if you want to play the cheap-money game. You don't think its coincidence, do you, that Verizon Communications (VZ) just sold $49 billion in bonds, beating the largest previous biggest bond offering by Apple (AAPL) by a mere $32 billion? Verizon sold $15 billion just in 30-year bonds.
This remains a global financial market driven by the availability of cheap cash. And the single biggest worry is that the world's most influential central bank can't be all that far away from taking away the punch bowl.
Look past negative data
If your goal is keeping money at work, it pays to look past negative data, or the lack of data, for as long as you can. The US markets did that immediately after the Federal Reserve decided on September 18 not to begin to taper off its program of buying $85 billion a month in Treasurys and mortgage-backed securities. The S&P 500 rallied, even though the Fed's decision to keep pumping the full $85 billion a month into the global economy (and global financial markets) was predicated on persistent underperformance in the real economy.
As markets get closer and closer to what they feel to be the end of the ball, with its cheap cash punch bowl, you can expect to see more volatility. The trend may still be upward—after all, the cheap money is still available—but market volatility will increase as everyone edges closer to the door.