Wednesday, January 8, 2014

Tolerating Tapering (excerpt)

Yesterday, when I accentuated the positives on the outlook for the US economy and the stock market, I listed “tolerating tapering” as a likely upbeat development. It didn’t take long before I received a few emails from our accounts noting that the S&P 500 had a 16.0% correction lasting 69 days after QE1 was terminated, and a 19.4% drop lasting 154 days after QE2 was terminated.

Stocks recovered decisively after the first correction following a speech at Jackson Hole by Fed Chairman Ben Bernanke on August 27, 2010. He suggested that the FOMC could implement QE2, which was announced November 3, 2010. Stocks recovered again after the second correction when the Fed implemented Operation Twist during September 2011 and followed it up with QE3 and QE4. (See QE & the Markets.)

The question is whether QE5--i.e., the tapering of QE4--will cause another significant correction or even kill the bull if tapering leads to the termination of quantitative easing. Yesterday’s minor 0.4% drop in the S&P 500 suggests that stock investors might be ready to tolerate more tapering, which was implied in the minutes released yesterday of the December 17-18 FOMC meeting.

Today's Morning Briefing: Tolerating Tapering. (1) Stock prices: 10% per year for another four years? (2) Looking down on tapering. (3) Terminating QE1 and QE2 led to big corrections. (4) From QE1 to QE5 and beyond. (5) FOMC sees more of QE’s downside for financial stability. (6) Diminishing returns. (7) Not sure if and how it works. (8) A good trade: More growth less QE. (9) Ideal for Rational Exuberance scenario, with earnings rather than P/Es driving stock prices higher. (10) They’ve had enough of QE. (More for subscribers.)

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