Why the Fed Needs to Taper Now and Not Later
Another record for the S&P 500 last Thursday. More money in my trading account. So why, then, am I not that pleased to see record levels and great advances in the stock market?
Here’s the thing: the gains in the stock market are great, but it’s not an easy market to trade in and probably even more difficult for the average investor who is scouring prices each day to find out how much more money they have made. While I’m not saying the stock market is euphoric, I do feel there’s some froth that has developed and made investors less concerned about risk.
There’s a feeling of invincibility. Even friends of mine who are not in the investment business are making tons of money buying anything out there because the reality is that this is a market for easy profits. There’s even been some talk of 1999 and what happened back then—you all know what that end result was: the NASDAQ traded around 5,132 at its peak in 2000.
The irony that is developing is that traders want to see economic growth creep along and not explode so the Federal Reserve will continue to give us money. Simply take a look at what happened last Friday when the unemployment rate made a surprise two-basis-point drop to 7.4%. The stock market turned lower. Normally, the decline in the jobless rate would boost the stock market, but the fear is that Ben Bernanke is sitting at his office preparing for tapering, which becomes more and more likely with every economic improvement.
Of course, the magic number Bernanke wants to see for the unemployment rate is 7.2%. The Federal Open Market Committee (FOMC) meeting last week proved this as Bernanke said tapering may not be for a while. At this point, he should begin to ease off, but the stock market doesn’t want this as investors are addicted to the easy money and will need to be weaned off it like they would a drug.
As many of you know, my feeling is that the Fed needs to begin tapering as soon as September. Enough is enough. Taking a bit off its bond purchases will be fine; the stock market will eventually realize that slightly higher bond yields are OK as long as the economy continues to show growth. This was the way it used to be before the current Fed decided to become the monetary dealer of easy money and create a mass of addicts nationwide.
So, I hope Chairman Bernanke is reading this. He needs to ease off and not baby the economy back to perfection. A little help is fine—but now, enough is enough.