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Mutual fund manager, CFA, registered investment advisor, macro
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"We fear things in proportion to our ignorance of them." - Christian Nestell Bovee

The S&P 500 (SPY) fell across the board last week as yields stabilized on continued concerns over the Federal Reserve's upcoming meeting, and whether the "dreaded" taper will occur as a result. The combination of a budget deal getting reached, alongside better than expected retail sales is causing the rhetoric around Fed policy to heat up. However, such obsession on what the Fed does now is unjustified. Why the Fed would decide to make a major change to policy before Yellen officially takes the helm is beyond me. Sure - economic data is at the margin improving and we may be (finally) on the cusp of some sort of job creation acceleration, but reflation remains elusive. The Fed at the end of the day is highly aware of the perils of deflation, which means the real area to focus on is inflation expectations.

More important things are underway here based on market dynamics in the near-term than Fed policy. Credit spreads (EMB) in emerging markets are falling, and copper (JJC) is showing signs of life. Export data coming out of China (FXI) continues to surprise on the upside. Brazil's Central Bank Governor Alexandre Tombini gave a reassuring message to markets that the Fed actually should taper. Despite slower economic forecasts coming out of Russia (RSX), Keynes is visiting the Kremlin as Putin reassures on government spending. While emerging market stocks fell alongside developed equities, the reality is that significant reasons to allocate to BRICs do exist, and are only strengthening. With valuations in many cases absurdly low relative to developed equities, and given the nature of emerging market moves in the past, the investment community may be underappreciating how fast a move may come as leadership takes root beyond the coming week's taper uncertainty.

To that point, very little seems to confirm the idea that the Fed either will taper, or that it will even matter. Logically, it does not make sense for the Fed to rock the boat into year end, especially when a new captain will shortly steer the ship. Inflation expectations remain extremely muted, and deflation fighting credibility likely will grow if the Fed steps away from some bond buying at the same time there is no self-reinforcing trend in reflation. The Dollar is not showing signs of strength, indicating that even within the currency market there are no real concerns. Emerging market currencies (CEW) as well are showing considerably more resilience than the May-June period when a collapse took place. Yields (TLT) are also stabilizing.

Does that mean US stocks won't fall if they choose to taper or not taper? No. I have stated before, it appears bonds and emerging market equities have more than priced in tapering. Euphoria as evidenced through extreme bullish sentiment and belief that the outlier nature of this year will continue means that US markets have not priced in not just tapering, but any pessimism at all. Meanwhile, commodities, bonds, and emerging market stocks have taken the brunt of negativity. Extreme bullish sentiment on US stocks combined with extreme bearish sentiment on emerging markets is almost too perfect a setup to ignore in the near-term.

Having said all that, the weekly rotational nature of our strategy will position us into those areas which favor historical cause and effect on average rather than in outlier periods like 2013. Finally, I wrote a lengthy piece reviewing this year and the analysis which I encourage readers to review. It is important to taper wrong assumptions and thinking as it relates to market behavior in 2013, regardless of what the Fed does next.

Source: Have No Fear If Taper Is Here

Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.