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Should You Stay in Stocks When Fed Finally Tapers?

Should You Stay in Stocks When Fed Finally Tapers?Should You Stay in Stocks When Fed Finally Tapers?

By George Leong for Investment Contrarians |

Fed Finally TapersFor me, trading has always revolved around economic fundamentals and stock market analysis. And if you’re like me, you’re getting somewhat irritated with the recent trading in the stock market by investors who seem more inclined to trade on what economists at the Federal Reserve do with their quantitative easing strategy than on what’s really important—the underlying fundamentals of the economy and corporate America’s financial health.

The reality is that corporate America is struggling to grow revenues. This means that companies and consumers aren’t spending at levels that make me comfortable with the economy. Of course, the stock market doesn’t really seem to care; it simply wants the flow of cheap money to continue.

In my view, it’s the same old thing that continues to engulf the trading in the stock market, and it’s annoying. For instance, if we see strong non-jobs economic data, the stock market edges higher. If we see signs of strengthening in the jobs market, the stock market sells off.

Of course, that’s because the Fed has made it clear that jobs creation is the focal point that will dictate when the central bank will begin to taper its monthly bond buying program, an unprecedented policy that has added trillions of dollars of debt to the bank’s balance sheet.

While all eyes will be on the non-farm payrolls reading today, November’s ADP Employment Change reading released last Wednesday showed that 215,000 new jobs were created last month, which is well above the consensus estimate of 173,000 and the upwardly revised 184,000 jobs created in October. How did the stock market react to the good news? Negatively, of course, since the ADP reading suggests we could see another 200,000-plus reading for non-farm payrolls, which could push the unemployment rate down and increase the possibility of tapering.

There is concern that the Fed could begin tapering its bond buying as early as its December Federal Open Market Committee (FOMC) meeting if the November non-farm jobs reading is strong. However, I feel the Fed will wait to start its tapering until sometime early in the New Year, likely under the guidance of the next Fed Chair Janet Yellen. Another possibility may be a delay in tapering until the March FOMC meeting.

Clearly, traders are nervous. We are seeing the yield on the 10-year Treasury bond edge higher toward the three-percent level, which could trigger a sell-off in stocks. The previous high point was 2.98%, but a break above three percent could trigger a psychological change in traders, who may then begin to shift some capital out of equities and the stock market and into bonds.

At this point, you should continue to funnel money into the stock market. I’d even suggest that investors continue to do so when the Fed finally does begin its tapering, as low interest rates will help to support stocks.

However, it’s important to remember that as the tapering increases, action in the stock market will increasingly shift to the traditional method of analyzing the economy and corporate America for investing cues, rather than the actions by the Federal Reserve.

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Tags: 10-year Treasury bond, central bank, Federal Reserve, interest rates, Janet Yellen, jobs creation, jobs market, quantitative easing, stock market, stock market analysis, unemployment rate

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