In his press conference following the June 19th meeting, U.S. Federal Reserve (Fed) Chief Ben Bernanke likened the tapering of bond purchases to driving a car, suggesting that the gradual tapering of these purchases is like ‘easing off on the accelerator as the car picks up speed, as opposed to putting on the brakes.’ While the initial reaction of financial markets to this announcement has been a major sell-off, we believe that cooler heads will prevail and markets will resume their upward move once investors realize that they are probably getting the best of both worlds; the economic data is getting better, which should support stronger earnings and higher stock prices, while interest rates will still remain well below long-term averages and be supportive of higher asset prices. While the tapering of bond purchases will remove some financial stimulus, interest rates will not be heading materially higher for a long time.

Stocks had been losing ground over the past few weeks as investors worried more about the end of ‘Fed easing’, the fear being that the Fed would soon begin to taper back on their $85 billion monthly purchase of debt securities, thus removing the substantial liquidity that had supported the rise in stock prices over the past year. Stock markets were effectively having a ‘taper tantrum!’ Although the monetary stimulus was definitely going to be removed at some point, the Fed had repeated many times that it wouldn’t begin until the U.S. and global economies were on a more sound footing. In fact, the Fed had continually indicated that the timing of the removal of this stimulus would be ‘data driven’, meaning that they would need to see much stronger economic data over a number of months before changing policy. On that count, we can see why the Fed indicated they would most likely begin to taper before year-end. The chart below shows the ISI Surveys, which have recovered in 2013 and don’t look to be having the same type of downturn we saw in the prior 3 years in the 2nd quarter.

No Spring Swoon in Economic Surveys

So if the actions of the Fed are ‘data dependent’ and the data is getting better, then the recent Fed announcement is really no surprise. When it came to timing, there was also the issue of how long Fed Chairman Ben Bernanke would be in his current position. His 2nd term ends next January and there were mixed expectations on whether he would be asked to stay on for a 3rd term. In an interview a few days ago, U.S. President Barrack Obama indicated that the Chairman had already exceeded his expected term in office, which seemed to indicate that he won’t be re-appointed. Market watchers then surmised that the Fed Chairman would probably want to have at least started the ‘exit strategy’ from the current easy money policy of the U.S. Federal Reserve that he enacted in 2008 to help the U.S. get through the financial crisis.

Why is the economic data getting better in the U.S. and will this spread to Europe and beyond? When most people have a job and a house and the value of that home is not falling, then confidence levels tend to increase and spending patterns follow. This is shown very clearly in the Conference Board’s Index of Consumer Confidence (shown below). After collapsing to all-time lows during the financial crisis, this number has been increasing, although with much shorter-term volatility. The index recently broke to a new cycle high and looks to be headed back to the levels where it was during the more buoyant economic period of 2003-2007. This confidence is showing up in spending numbers in the U.S. but should also start to be seen in the export figures from some of their trading partners. In fact, we saw a 10% surge in Japanese export figures this week, which is the best result in over 3 years. Is the U.S. ready to carry the global economy on its shoulders?Employment Growing and House Prices Rising

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