The last thing the American economy needs in this final week of holiday shopping, a key period for retail sales and the economy, is a meaningful stock market decline. While the Federal Reserve has done a good job of preparing the investment community for its eventual action, such action on this Wednesday would still be poorly placed. If stocks collapse on what would still be a surprisingly timed action according to economists' expectations, you can be sure that American consumers would notice the decreased values of investments in their retirement portfolios. As a result, they would probably spend more carefully through the close of the important shopping period, driven by uncertainty if not by their decline in wealth. January or February would make a lot more sense for the start of tapering, whether it's supported by economic data today or not.
You can see trepidation in stocks of late, and it's been driven by investor concern about a possible start to Federal Reserve asset purchase tapering. The chart above shows the SPDR S&P 500 (SPY), SPDR Dow Jones Industrials (DIA) and the PowerShares QQQ (QQQ), good representatives of the market. Except for Monday's gain, they have exhibited worry about the Fed. I think this is a sign of what would follow any Fed tapering Wednesday.
In a previous article, I suggested investors not fear the taper itself, but rather the reaction of other investors driven by fear and greed. That's because a well-timed taper and shift in monetary policy would be a good thing for investors. It would presumably come under sure economic footing and before inflation could ignite.
We have seen the unemployment rate drop to 7.0%, the point at which Chairman Bernanke suggested tapering would become appropriate. Last week's reported retail sales data for November were simply astounding and indicated consumers have a propensity to spend. The week before that, stellar New Home Sales were reported, though housing stocks fell on the day of the report due to investor fear of rising mortgage rates on an increasingly probable Fed taper. Data point after data point has given the Fed more reason to alter its monetary policy and reduce asset purchases. Still, I say that while the economic data has been more than good enough over the last month, now is still not the appropriate time for the Fed to begin its signaled shift. While economists' expectations have increased for Fed action in December, to 34% from 17% in November according to a Bloomberg News poll, it would still be a surprise to a majority of them.
It might have been the right time, if it were not in the midst of the holiday shopping frenzy that makes America go round. This last week before Christmas and the day after it are still critically important to retailers. What's critical to retailers is important enough to the American economy to hold off Fed action in my view. If the Fed were to announce the start of Fed tapering, any stock market reaction threatens to accelerate into the close of the year.
SPDR S&P 500
SPDR Dow Jones
There is a good amount of paper profit tied into the market this year, as you can see in the year-to-date performance of the SPY, DIA and QQQ. If stocks start lower, I expect selling will beget selling, as profits that were planned to be taken at the start of the new tax year will be preserved and taken this year. Uncertainty will enter the investor mindset, and there will be little reason to bear risk if selling cascades.
A scenario in which equity values decline meaningfully has the ability to affect consumer spending. This is entirely the wrong time for that to be at risk. So, a Federal Reserve that has tiptoed its way out of stimulus would probably be wise to walk away from tapering once again this month and save the move for a time when it has less likelihood to impact the economy so significantly.