A couple months ago we wrote that the stock market’s reaction to Fed tapering should become more muted over time. The initial knee-jerk reaction took -7.5% out of the S&P 500 in a matter of five weeks. Adding to the magnitude of the pullback was an overbought market and a summer growth problem similar but smaller than we have seen in 2010, 2011 and 2012.
The mini summer growth problem appears to behind us. Economic news (which has been better of late) is light this week and second quarter corporate earnings (which have been better than expected) are winding down. Stocks have had a tremendous run the past six-weeks and need a breather. Relatively hawkish comments yesterday by Charles Evan, president of the Chicago Fed, who is a notable dove, has given the market a reason. We expect this to be a mini Fed tapering fire drill.
Although the economy is not growing as many had hoped or compared to past recoveries, the economy is growing (and should accelerate this fall). Evans said the central bank is “quite likely” to slow down its monthly $85B asset purchase plan “later this year” as it continues to shoot for lower unemployment and inflation targets. We would be buyers into this weakness.