Has the Stock Market Discounted Full Tapering by the Fed?

Stock Market Discounted Full Tapering by the FedWell, here we are with only a few days left for Ben Bernanke in his role as chairman of the Federal Reserve, which has also been aptly dubbed as America’s “money printing press.”

In his final meeting as the head of the most powerful central bank in the world, all eyes will be on Bernanke and whether he decides to initiate his second tranche by further reducing the Federal Reserve’s bond buying at the Federal Open Market Committee (FOMC) meeting that ends today.

It’s really anyone’s guess if the Federal Reserve Chairman will taper. Bernanke may want to continue to slowly taper to show market participants that he understands the economy is faring better now, lessening the need for easy money from the Federal Reserve.

Of course, Bernanke could also hold off on any further tapering due to the weak jobs creation numbers from December; albeit, the reading was likely an aberration that was due to the harsh winter conditions in the month.

Whatever he decides, my feeling is that the stock market is fine with the Federal Reserve’s tapering process as long as the reduction is steady and gradual. The market wants to see the economy and corporate profits/revenues grow, which is ultimately the bottom line for investors.

Should the Federal Reserve not decide to taper further today, it would add some support to the stock market and could drive stocks to another rally. It would also help add some support to the emerging markets, which have been under extreme pressure due to Bernanke’s first move to taper.

If the Federal Reserve does further taper its bond buying, I really don’t think it’s a big deal, as the economic renewal appears to be in place and it’s time for the central bank to let the economy ease off the easy money and stand on its own footing with each passing month.

It’s time to ease off of the throttle and return the stock market to some normalcy instead of depending so much on hand-outs from the Federal Reserve.

With each major decline in the stock market, I see a buying opportunity emerging. The bigger the decline, the better the opportunity will be to make some money.

But some argue that cutting back on the bond buying will push up bond yields and increase the flow of capital from equities to bonds. This is valid, but the best opportunities for investors will continue to be in the stock market, even as bond yields edge higher. Just recall what happened during the period of 1980–2000, when stocks rose. Interest rates and bond yields were quite high, and sometimes in the double-digits, but stocks continued to move higher.

So I say ignore any of the doom-and-gloom scenarios—at least for the moment—as I still feel the stock market is heading higher, but it will be a more arduous path than in 2013 and the last four years. (Read “Could This Bull Market Last a Decade—Or Longer?”)