Tapering and it’s effect on the market (equities and bonds)

[jongaltiii]

I think this link provides a good summary of QE and tapering and it’s effect. www.brookings.edu/blog/up-front/2021/07/15/what-does-the-federal-reserve-mean-when-it-talks-about-tapering/

My take-away is that it could very well be a signal of rising interest rates (2022?) and a negative for bonds. It may also provide increased volatility in equities but this should stabilize like it did the last time ala Bernanke. Theres a bit of irony given that the Fed by tapering is signaling that the economy is doing better than expected. It will be gradual if you take them at their word.

The market didn’t like the news today: www.marketwatch.com/story/u-s-stock-futures-point-to-consolidation-ahead-of-fed-minutes-11629285529?mod=home-page

“Since the July FOMC meeting, the probability of a September announcement and an October, or November, start date to tapering those purchases has increased considerably, in our view, with the August payroll release coming out in early September likely to be the most important factor to tip the scales,” BlackRock’s Bob Miller, head of Americas fundamental fixed income, wrote in emailed comments.

“Boston Fed President Eric Rosengren, who will also be a voting member of the policy-setting committee next year, said he would support tapering the large-scale asset purchases this fall because rising inflation and debt loads could eventually threaten the recovery, in an interview with…
www.ft.com/content/bafad111-01e5-4600-b34c-13028c3826ea 

What do you think? 

[Deleted]

I think this has been a long time coming and it's coming. We have an economic boom (earnings) and increased price levels. Hopefully wages are on their way up. We have a Fed committed to keeping rates as low as they can. Investors will look for yield in assets that are not earning a negative return. To my way of thinking, this has been the slow burn since stimulus began, combined with pent up demand. It is taking a long time to get there, but it is getting there. I ended up not buying BND or BIV in December with this outlook. Not a fan of buying assets with negative returns.....knowingly at least.

[Chahta]

Seems to me that this market has been supported by the Fed with so much liquidity. It will have to react to less at some point. Hopefully there are buying opportunities ahead.

[uncleharley]

The current trend in the value of the USD will give us a clue as to the direction of most domestic stocks since they tend to move in an inverse direction to the dollar. This mornings break above the lip line of a cup w handle pattern projects an upward move of 4 to 5% in the value of the dollar over the shorter term. The move will provide a headwind to most stocks as well as many commodities. A stronger dollar is consistant with a tapering of QE.


stockcharts.com/h-sc/ui?s=UUP&p=D&b=3&g=0&id=p99005914879&a=412681804&listNum=86

[bb2]

From this, a 2017 paper from Western Asset, FWIW.


"A common observation about the taper tantrum in 2013 is that bonds and risk assets both experienced a period of negative returns, thereby upending the negative correlation between the two that is the foundation of many portfolios, including portfolios at Western Asset. This was true, but it was only so for a very limited time period. Specifically, in the month following Bernanke’s comments, the S&P 500 fell by 6% and a broad index of US Treasury bonds fell by 2%. As would be expected in such an environment, corporate bonds performed poorly, both due to the rate exposure and due to the credit component, and the high-yield index lost a total of 5% over the same period.
However, this one-month perspective is almost surely too narrow. If we broaden the horizon to include the six months following Bernanke’s comments, the picture looks different: S&P 500 +8%, US Treasury Index -1.5% and high-yield bonds flat. And if we broaden the horizon a step further to include all of 2013, then the correlations again look normal, insofar as bonds and risk assets were negatively correlated: S&P +25%, US Treasury Index -2.5% and high-yield +6.7%.

Which time horizon is the correct one? While those concerned about the possibility of positive correlations working against a portfolio that has both bonds and risk assets can point to the month following Bernanke’s comments as proof that it can happen, focusing on this one month misses the bigger picture: that 2013 was a standout year for risk assets, and given that, it is not too surprising that US Treasuries (USTs) had modestly negative total returns. When assessed in the proper perspective, such a combination of price moves is neither puzzling nor alarming."

(Love that word alarming. When my dad found a pot pipe on the kitchen counter one night long ago, I said, "No reason to be alarmed." He said, "Do I seem alarmed?")

www.westernasset.com/us/en/research/whitepapers/taper_lessons-2017-08.cfm

[FD1000]

I think it's business as usual...why?
- if you can invest in equities, you should, after all, stocks beat bonds long term
- I can find articles from years ago that claim the same thing, rates can only go up
- I can find dozen hundreds predictions that were not accurate short term
- These articles mostly discuss treasuries, but we know there are other categories.  HY munis had a terrific YTD
- Most should just stick with their LT asset allocation
- If I had to make a choice, I would not hold treasuries. Your situation may be different.

[oldskeet]

Hi FD1000. Old_Skeet plans to keep on keeping-on and remain invested within his asset allocation of 20/40/40 (cash/bonds/stocks); and, to buy around the edges when good buying opportunities become present. I have no plans to cash out as some will no doubt do that are invested beyond their risk tolerance. If too many investors hit the cash out window at the same time we could indeed see stocks move into correction territory or perhaps even a bear market. And, if they do, Old_Skeet will have his buying britches on. There is an old saying don't fear the bear. Just know one day bear markets will appear. And, with this, be prepared to take advantage of them when they come. For me, it becomes feed on the bear time.  Old_Skeet

[FD1000]

oldskeet , correct. Most should know their goals and invest accordingly with minimal trades and/or at least minimal AA adjustments. 
I posted similar thoughts months ago 2/1/2021 (here).  At that time, several "experts" were calling for market top.