Don't Fear The Taper

By Nicholas Jasinski | Friday, August 20

Small-Cap, Big Pop. Investors headed off for the weekend with a bang today, pushing all 13 S&P 500 sectors higher to cut the index's losses for the week. Stocks opened in the green and continued rising through today's session.

The S&P 500 finished the week just 0.6% lower than where it started it, after losing some 2% on Tuesday and Wednesday. Once again, investors have successfully bought the dip after a spell of declines. It's a strategy that has worked without fail for the duration of the pandemic-era bull market.

The S&P 500 closed up 0.8% today, the Dow Jones Industrial Average added 0.6%, and the Nasdaq Composite jumped 1.2%.

The Russell 2000, meanwhile, popped 1.6% today. It has been tougher going for the small-cap index of late. It's down more than 8% since setting record highs in mid March, and flirted with correction territory earlier this week.

The catalyst for the losses earlier this week was the latest hand-wringing about when the Federal Reserve could begin withdrawing the emergency stimulus in place since March 2020. Minutes from the latest meeting of the fed's monetary policy meeting confirmed that officials have discussed tapering monthly purchases of U.S. Treasury and mortgage-backed securities in the coming months.

Barron's Ben Levisohn shares his thoughts on the tapering threat—or non-threat—to markets in this weekend's Trader column.

He writes:

There seems little reason to actually expect a repeat of 2013, when Ben Bernanke most certainly did shock the market when he first discussed the subject [of tapering.] This time, everyone knows the taper is coming—even if Rob Kaplan, the hawkish president of the Dallas Fed, muddied things a bit by saying the he’d rethink his call if the Covid-19 Delta variant showed signs of slowing economic growth.

More important, though, the original taper tantrum wasn’t nearly as bad as its reputation suggests. Yes, stocks tumbled 5.8% from May 22 through June 24, 2013, but that loss was made back in just 12 days, notes BMO Capital Markets strategist Brian Belski. Nor does the stock market need [quantitative easing] to produce gains, though they have been larger during periods when the Fed is buying bonds than when it isn’t.

'As such, the so-called taper tantrum of 2013 actually represented a buying opportunity in U.S. stocks,' Belski explains.

The past week certainly followed that pattern, if only in a microcosm. Investors are always on the look out for what could go wrong next. But as a group, they can easily become too pessimistic, or miss out on all the positive news in favor of a focus on the bad.

The Wall Street saying that "stocks tend to climb a wall of worry" so far has applied to the 2021 tapering trade.

Watch our TV show on Fox Business Fridays at 10 p.m. or 11:30 p.m. ET; Saturdays at 10 a.m. or 11:30 a.m. ET, or Sundays at 7 a.m., 10 a.m. or 11:30 a.m. ET. This week, an interview with San Francisco Fed Bank President Mary Daly. Plus, a look at Cathie Wood vs. Michael Burry.