Don't Fear the Taper

11/12/2013 9:00 am EST

Focus: STRATEGIES

It's still too early to worry about the Fed tapering; yes, Fed tapering will be a legitimate worry in a few months, but should not be yet, suggests market timing specialist Sy Harding in his Street Smart Investing.

Analysts and economists have been concerned for almost five years now about how Fed Chairman Bernanke would ever be able to manage a successful exit from the Fed's massive QE stimulus efforts.

QE2 was scheduled to expire at the end of June 2011. But the S&P 500 topped out in May 2011, and plunged 19% to its October low.

In seeming panic, the Bernanke Fed rushed to the rescue with Operation Twist on September 21, 2011; that new stimulus program reversed the market correction on a dime. The market has not experienced even a 10% pullback since.

There was a brief pullback in the spring of 2012, on concerns that Operation Twist was due to expire in June. But the Fed quickly extended Operation Twist, and followed that up with a new stimulus program, QE3, last September.

The result was that, last fall, the stock market launched into the powerful new leg up that ran through last winter, and continued even through the market's unfavorable summer season this year.

It did pull back briefly a couple of times this year, again on Fed worries. However, when the market sold off in May, Bernanke rushed in to provide assurances that tapering will not begin until the economy can handle it. The market rallied back to new highs.

The market stumbled again in August, on concerns the Fed might begin tapering at its September meeting. But the Fed announced its no taper decision after that meeting, and the market recovered again, rallying back to still higher highs.

Now expectations are back that tapering could begin as early as the December meeting. That is highly unlikely for a number of reasons.

To begin with, the December and January FOMC meetings will be Bernanke's last, the end of eight years of his governance.

It's improbable that after launching the stimulus and keeping it going all this time, he would make the major decision to begin tapering as his final act in office, leaving it up to his successor to deal with the fallout.

In addition, let's not forget that the spending bill and debt-ceiling crisis were only kicked down the road to January and February.

So, unless the economy forces its hand with a dramatic upturn of positive reports, including a big turnaround in recently slowing employment, and in the slowing housing recovery, the new market worries about the Fed tapering earlier than next spring are quite-likely misplaced.

Investors probably have reason for caution short-term, due to the market's short-term overbought condition and the high level of investor bullishness. But the renewed concerns about Fed tapering soon are probably premature.

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