With the holiday season upon us, we are a few short weeks away from closing out a good year in the US stock market. In addition to the questions of gifts for loved ones, many investors’ minds are pondering ‘Will the markets will continue their slow melt-up or begin an inevitable pull back’? There are several data points we are monitoring to answer this question, as for what to get for your loved ones, you’re on your own on that one 🙂 . Here are our takeaways from our review and consideration of information from the following sources.
The Fed
On Friday we will get the much anticipated November employment report. With the government shutdown skewing the October release and no scheduled press release after this one until March, the data and commentary will be essential in future projections and outlooks. The Federal Open Market Committee (FOMC) meeting scheduled for next week will give the fed ample time to digest this report and the markets will be watching and listening closely for any hint or indication of when the taper will begin.
Minutes from the Fed October Policy meeting said that the fed is watching the economic recovery carefully and that a policy change could come at one of its upcoming meetings. Fed Chairman Ben Bernanke suggested the recovery continues at a slow pace and they will keep rates low for the foreseeable future. Our team believes that the Fed is just as concerned with deflation as they are inflation. Given the latest IMF reduction in global growth for 2014 down by .2 to 3.6%, our view is that tapering is likely an early 2014 event.
Janet Yellen
While the full senate vote is still a couple of weeks off, we are confident Janet Yellen will become the first woman to run the fed. In her testimony comments, she too continued to stress concerns and echo Bernanke’s viewpoint about the pace of growth and will likely maintain a stimulative Fed posture.
Consumer Data
We are seeing that the data and information regarding the state of the consumer continues to be mixed. So far this year, consumer prices have risen just 1% and producer prices just .3%. The modest increases are due largely to the drop in energy prices. The November University of Michigan Consumer Sentiment survey showed a slight increase from 73.2 to 75%.
Summary
Our bottom line view remains the same. In terms of the direction of interest rates, we do not believe the Fed will make any meaningful changes for at least a year. We do believe however, that the taper will begin in early 2014 although likely in the form of a modest reduction in purchases of treasuries. This change in sentiment will likely cause a much needed correction in the markets that will set the stage for continued advances in 2014.
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