The Post-Fed Paralysis

Market Forecast 9/24/2013

Last week’s surprise Fed decision to hold off on any “tapering” of its $85-billion-per-month bond-buying scheme caused a lot of dislocation in the financial markets. First there was the big spike higher in stocks, bonds and gold prices immediately following the news. Then just a couple of days later there was some big selling in the equity markets as several Fed governors came out and said that the tapering could begin as soon as next month — depending on the data.

The result of the Fed’s decision last week, and the renewed taper talk that followed, has left the markets somewhat paralyzed about what to do next.

In fact, since the Fed’s decision a week ago, stocks have given back all of their post-decision gains. Bonds have rallied, and bond yields have seen a big plunge. We’ve also seen some modest economic data such as a decline in consumer confidence and a tepid durable goods report.

I suspect that unless we see some very strong economic data in the next month, something I definitely do not expect, we aren’t likely to see a major tapering effort until at least the end of the year.

I also think that situation could keep a lid on bond yields, at least in the short term. The chart below of the 10-Year Treasury Note yield ($TNX) clearly shows the move lower in yields, i.e. interest rates, since the Fed made its “no taper” announcement.

Meanwhile, stocks also have come back well off of their recent spike to new highs, as you can see in the chart below of the S&P 500 Index. The breakdown this morning below the psychologically significant 1,700 level is something to watch, as it could signal more downside in the days and weeks to come.

Now, if the Fed-engendered paralysis in the market — in terms of equity buyers stepping up and what is likely to happen next — wasn’t enough to make you nervous, then looking on the horizon at the pending debt-ceiling and government shutdown debate may get you really nervous.

The fight now is just getting heated about the funding of the federal government, ObamaCare and the lifting of the debt ceiling. I suspect the fight is going to get really ugly during the next several weeks. As such, we could be in for much more uncertainty, much more volatility and a whole lot of walls of worry that need to be climbed before the dust settles.