We appear to be getting closer and closer to QE tapering as economic news continues to be consistently good. I am of the belief that the tapering process is a good long-term move for the economy as a whole. When it learns it can stand on its own two feet it will be much better, but at the same time I also know it's going to be a rocky road getting there and this is what investors need to consider over the next six months.
We have watched the major market ETFs like the (SPY and QQQ) react up and down as investors try to guess when the Feds are going to begin the tapering process of the stimulus program. Investors continue to anxiously watch the economy as there is an "unspoken expectation" that tapering will start this fall. The largest short-term struggle that we are going to have is the data that continues to come in that point to a likely pullback of the Fed stimulus in the coming months.
Global economic indicators are starting to support other regions climbing out of recession or economic slowdowns. Signs that China's slowdown may have run its course are taking place. Expectations that data this week will point to the euro zone pulling out of its longest recession have come to fruition and point to the global economy gaining strength.
What will the stock market look like when it can no longer depend on the Fed's program?
The general consensus is at first a struggle. The market has been so dependent on the stimulus program that as it begins to fade, the economy has to stand on its own two feet. Confidence may temporarily fade and rattle the stock market.
What if the market is able to stand on its own? What if the stock market stands on its own 2 feet despite the Feds taking away the markets favorite drug - the stimulus? Is it possible that investor confidence will improve because the Feds are taking away the stimulus program? Even though "politics" have played a role in convincing us that without the stimulus program, economy would have failed, I am not convinced the economy is dependent on the government.
September is a good candidate for the beginning of the tapering process for the QE program. If this is going to happen, the Feds are going to want to see economic growth hold steady or improve. With the feds out of the way, the indecisiveness may no longer put us in perpetual "wait and see mode" but help us make concrete decisions to move forward.
Once the economy realizes that it doesn't need the Feds and can survive on its own, there is a good chance the new-found confidence will drive the markets much higher. I personally believe this will be a stimulus far greater than the government could ever give us.
Even though I may have this optimistic and bright picture of the future, I am a realist when it comes to what I expect will happen. Before the market finds its legs, it's going to have to learn to tread water by itself again and this is going to lead to typical periods of volatility. The market will experience economic anxieties and financial volatility as the tapering becomes a reality and temporary fear sets in.
It's going to be a bumpy ride and these ongoing worries about the Fed's exit strategy will temporarily put a damper on the progress in the stock market. Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, expressed what we might see as the tapering process begins when he said this:
"Unless we see some real strong growth numbers coming out of the economy, I'm looking at a 10% correction between now and October. It's time to be very defensive."
Long term, I do believe the economy can sustain itself and so can the markets. Short term, I believe we are in for some rocky road ahead. I don't believe there's anything strange or out of the ordinary about this because the economy will struggle until it finds his feet, but I believe it will continue to gain confidence months after the tapering starts. Investors stay alert.