State Of The Markets: New Information

Last week, we looked at three key issues that the stock market seemed to be struggling with: (1) The possibility of the Fed "tapering" their bond-buying program earlier than expected, (2) the potential for inflation to become ingrained (a.k.a. non-transitory), and (3) the unavoidable slowdown in economic/earnings growth that will be coming down the pike in the coming quarters.

In light of the fact that stocks went nowhere on the week - albeit in a sometimes-violent fashion, I'm going to suggest that investors continued to struggle with the aforementioned issues. Thus, I think we can agree that the major indices remain in a consolidation phase.

The next question, of course, is: what comes next? Typically, stocks tend to exit a consolidation phase heading in the same direction they were moving when the sideways action began. As such, one can argue that the next important move ought to be higher. However, such a move would require the market to come to grips with the issues it is currently working through.

On that score, markets did receive some new information last week, as the minutes from the April FOMC meeting stated that the members of the committee have indeed started talking about tapering the pace of bond buying. The actual language was relatively benign, as the minutes stated:

"A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."

This makes perfect sense. After all, the economy is improving at a faster rate than had been expected. Therefore, if GDP growth continues apace, it would be logical for the Fed to start talking about tapering, right?

However, one thing I've learned over the years is that markets don't like surprises. And to be sure, this was a surprise. So naturally, rates spiked up on the news, the dollar fell, and the probability of a rate hike within the next year moved up on the week as traders started digesting/discounting the change to the Fed landscape.

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

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