What Will Happen When the Fed Finally Ends Its Extreme Easing Efforts?

Last Wednesday, Fed Chairman Ben Bernanke promised to end his bond-buying addiction  – cold turkey – in mid-2014. That is, as long as the economy is strong enough. As a result, investor fortitude was pushed to the brink. Stocks sold off hard, sending  the S&P 500 Index down 1.4%. Before you head for the exits, too, let’s get a little perspective.

So writes Louis Basenese (www.wallstreetdaily.com) in edited excerpts from his original article* entitled Nothing But Minor  Jitters.

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Basenese goes on to say in further edited excerpts:

Although  Wednesday’s post-Fed meeting selloff was bad, it hardly qualifies as horrific. Back in September 2011, for  instance, the S&P 500 actually sold off twice as much on the Fed’s  comments and, although the downturn might lead you to believe that volatility is on the rise,  that’s just not the case [as the chart below shows].

Over  the last 50 days, the S&P 500 has been up or down an average of just 0.69%,  according to Bespoke Investment Group, but  rewind to early 2009, and stocks averaged a daily move of more than 4%. Now that’s volatility!

Now that we know volatility has been worse before, should we just stay calm and carry on? Let’s  get a little more perspective first.

The Tale of the Tape(r)

When the Fed starts to taper (i.e. – gradually reduce its monetary stimulus efforts), it could  bring about the end of the bull market. Notice I said “could” and not “will.” A quick glance at Japan’s history [in the chart below] reveals why.

When  the Bank of Japan (BoJ) tapered in 2006, the Nikkei 225 Index dropped 20% in a  matter of months but, as Societe Generale’s Alain Bokobza notes, “The selloff  was nonetheless short lived.” In  fact, Japanese stocks didn’t stop rallying until a year later, which coincided  with the start of the Great Depression – not the actions of the BoJ.

Conclusion

[Given the above example it makes sense to conclude that] when the Fed ends its extreme easing efforts, it might hurt a little, but not necessarily a lot or for very long. That is, if history is any guide. (Hint: It is.)

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.wallstreetdaily.com/2013/06/21/fed-bond-buying/ (© 2013 Wall Street Daily, LLC. All rights reserved.)

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