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Thursday, December 12, 2013

(Note: We all owe Mark Vickery a big Thanks for doing a wonderful job holding the AWS fort in my absence.)

Stocks have skidded lately as growing odds of a December Fed Taper have come in the way of an otherwise seasonally favorable period for the market. It may be premature to write-off the Santa Clause rally this year as it typically takes shape in the second half of the month. But the skittishness of the last few sessions should remind the naysayers that the Fed’s extraordinary policies have been more than a just a mere coincidence on the stock market’s upward march.   

Market bulls have been assuring us all along that the stock market’s relentless uptrend has primarily been a function of improving fundamentals and not due to the Fed’s QE program. But each time signs emerge that the central bank could be nearing shifting gears, the stock market rally starts to falter. And for good reason. The Fed’s efforts at creating a distinction between forward guidance and QE notwithstanding, investors are justified in perceiving the Taper as the opening shot in the eventual unwind of the super-easy monetary policy that has been in effect since the financial crisis. That’s the reason why U.S. treasury bond yields and emerging market capital flows respond so promptly to Taper fears.

Economic data has broadly been positive lately, notwithstanding the surprise jump in initial Jobless Claims this morning. But the Retail Sales numbers this morning were better than expected, maintaining the momentum from the recent jobs, GDP, and ISM readings. The Fed didn’t pull the Taper trigger in September even though the market was completely ready for it and it may end up doing the same this time as well. But irrespective of the Taper timing, we all know that it has to start at some stage. It wouldn’t be the end of the world for the market, but the resulting adjustment process will likely push stocks materially lower from current levels.

In corporate news this morning, Lululemon Athletica (LULU - Analyst Report) came out with positive earnings on in-line revenues, but guided lower. Adobe Systems (ADBE - Analyst Report) will report results after the close today. In other news, Facebook (FB - Analyst Report) will be joining the S&P 500, replacing Teradyne (TER - Analyst Report), after the close on December 20th.

Sheraz Mian
Director of Research

 

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