S&P 500 and Fed ‘tapering’ revisited

by George Hatjoullis

S&P 500

The above chart of the S&P 500 (courtesy of IG Index) reveals a somewhat unspectacular response by the index to talk of tapering. A correction was due and the ‘tapering’ narrative appears to have provided a suitable catalyst. The series of blogs here on this subject has already discussed at length the narrative evolution. It seems that as we approach the Federal Reserve meeting this evening that the market has started to come around to the narrative that I originally suggested was likely to emerge.

Chairman Bernanke, in his after meeting press conference, is expected to clarify that tapering is not tightening and that the Fed will only ‘taper’ QE in response to economic strength and not independently of it. In short, to continue my previous metaphor, only once the economic boat has got away out to sea and is in no danger of foundering on the rocks.The tone of any statement will be at pains to emphasise that, whilst the Fed may err, it will err on the side of caution.

Of course, what the Chairman tries to communicate and what the market chooses to understand may not match. Meaning after all is interjected by the reader and not the author of text. The market will choose to understand what it needs. It might be best to wait and see.

The index is presently compressed between 1600 and 1687. It may stay in that range for the whole summer and indeed until the ‘tapering’ begins. Whatever the Chairman says, there will be residual uncertainty and summer months are more often characterised by volatility than trend. This said, if the market buys the Chairman’s narrative it could trigger new all-time highs. After all, he will be saying that either you get strong economic data or QE will continue as is. If all this sounds confusing you have begun to understand why professional traders rely so heavily on chart analysis despite academics constantly telling them that the charts contain no information that is not already priced in. How many academics do you know that got rich from trading?

Notwithstanding the vagaries of the summer markets, the medium term trend for equities is higher. This view remains the constant refrain of these blogs. In part it is drawn from one simple observation; this time around the S&P 500 made a new all time high and has consolidated above the previous high. In doing so it has formed a base from which to trend up. Investors have had a wild ride since 2001 can be forgiven for being cautious. However, as time passes and the previous high is not breached the caution will fade.

This will be the last blog for a couple of weeks.