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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. (more…)