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Tag: tapering

Storms ahead? What you need to know

The stock market got a little crazy this week.

Is a storm coming?

Let’s take a look at what’s driving markets right now.

(Scroll to the end if you just want our takeaways.)

A few things are driving the market volatility:

Fears of a financial crisis in China.

China’s overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt.1

Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.

Worries the Federal Reserve will start tapering soon.

The Fed meets this month and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved.2 Firms that depend on low interest rates and easy credit could be hurt.

Concerns about COVID-19 case numbers.

Variants continue to pop up and the delta variant continues to keep cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.3

Fears of another debt ceiling showdown.

Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.

Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinksmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.4

Do you see a trend? Markets are being driven by fear, anxiety, and doubt.

Which of these squalls will fade away and which could blow into a tempest?

We can’t know.

So, here’s the real question:

Could we see a 10%+ correction in the weeks or months ahead?

Possibly.

Corrections and pullbacks happen regularly and it wouldn’t be surprising to see a market drop.

To show you just how ordinary corrections are, here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance.

(Take a look at the red circles to see the market drops each year.)

The big takeaway? In 14 of the last 20 years, markets have dropped at least 10%.5

Even years with strong performance saw big drops.

We’re dealing with a lot of uncertainty and investors are feeling understandably cautious about what’s ahead.

But, that doesn’t mean that we should panic and rush for the exits.

Pullbacks, corrections, and even downturns don’t last forever.

Trust the process. Trust the strategy.

We’re keeping an eye on the Chinese property market situation, as well as workings over in Washington. We can’t predict which way markets will go in the coming weeks, but we’ll be in touch as needed.

Have questions? Feeling uneasy? Please reach out. That’s what we’re here for.


1https://www.cnbc.com/2021/09/17/china-developer-evergrande-debt-crisis-bond-default-and-investor-risks.html

2https://www.nbcnews.com/business/markets/dow-futures-tumble-more-600-points-september-slide-intensifies-n1279618

3https://www.cnbc.com/2021/09/19/stock-market-futures-open-to-close-news.html

4https://www.nytimes.com/2021/09/20/business/stock-market-federal-reserve.html

5https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Taper tantrum part deux?

How are you doing?

Are you making plans for fall or taking a step back to reassess?

One big thing you may have heard about in the headlines is the Federal Reserve’s hint that it might start “tapering” soon.1

Could the Fed’s actions cause a correction or economic slowdown?

Let’s discuss.

First of all, what does ”tapering” mean?

In econ-speak, tapering means winding down the pace of the assets Fed has been buying since last summer.

Why is it a big deal?

Well, the last time the Fed tapered in 2013, during the recovery from the 2008 financial crisis, markets panicked and pitched a “taper tantrum.”2

That’s because traders worried that less Fed support would hurt fundamentals and potentially cause a market downturn.

Now, that old taper tantrum narrative is making folks worry that another market downturn could be ahead of us, especially with concerns about the delta variant.

Before we dive into what could happen, let’s talk about where we are and how we got here.

When the pandemic started, the Fed slashed interest rates and began buying $120 billion a month in bonds and mortgage-backed securities to reduce interest rates, lower borrowing costs, and give businesses and the economy a boost.1

However, now that the economy is much stronger, the employment situation has improved, and inflation is a concern, the Fed wants to start paring back those asset purchases to return interest rates to a more “natural” level.

What could that look like?

Obviously, we don’t know exactly when or how the Fed will decide to act, but analysts have some pretty good guesses.

The latest prediction by Bank of America suggests tapering could start this November as the Fed gradually pares back asset purchases through next year.1

The takeaway is that the Fed isn’t going to stop buying assets and raise interest rates immediately.

It’s going to gradually remove the support and see how the economy reacts.

So, will we see another taper correction?

The main reason folks worry about Fed reducing support is because of the effect higher interest rates could have on stocks, particularly companies that rely on borrowed money.

However, interest rates are just one piece of the puzzle. Economic fundamentals, earnings, and other factors also weigh on stock prices.

With the benefit of hindsight, we can see that the 2013 taper tantrum wasn’t even that bad. The S&P 500 tumbled 5.8% over the course of a month but quickly recovered (the caveat here is always this: the past does not predict the future).2

We think the main reason markets declined last time was that investors hadn’t experienced tapering before; they didn’t have context for what the Fed would do.

Since we’ve seen this happen before fairly recently, we think that uncertainty is lessened.

However, we also have other worries to consider: a deteriorating crisis in Afghanistan, continued pandemic worries, and political wrangling over infrastructure.

Any of these factors could derail the bull market.

But it’s not going to be the end of the world.

Corrections are always something we should expect. They happen regularly and are a natural part of markets.

The Fed is one more thing we’re keeping an eye on, and we’ll reach out if there’s more you should know.


1 https://markets.businessinsider.com/news/bonds/fed-taper-asset-purchases-november-bonds-mbs-federal-reserve-economy-2021-8

2 https://www.barrons.com/articles/stock-market-taper-scare-what-comes-next-51629505091