The 'Septaper' is coming: Deal!August 8, 2013: 12:03 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Psst. The Federal Reserve is probably going to start pulling back on quantitative easing next month. Pass it on.
Say what you want about the Fed under Ben Bernanke. But this push for greater transparency has made it a lot easier to predict what the central bank will do and when.
In what's shaping up to be yet another painfully telegraphed move, the Fed is likely to announce at the conclusion of its next meeting on September 18 that it will start to slow, or taper, the pace of its asset purchases.
Even some of the more dovish (i.e. those more inclined to keep rates ultra-low) Fed members are hinting that the taper is coming sooner rather than later.
In speeches this week, Chicago Fed president Charles Evans and Cleveland Fed president Sandra Pianalto said that the Fed would be prepared to cut back on its bond buys if the job market continues to improve.
It's gotten to the point where the term "Septaper" has now become a part of the trading vernacular. I joked about this Tuesday on Twitter.
Guess what? Just two days later and a search for "Septaper" now returns more than 18,000 results.
It seems that the only mystery surrounding the taper now is whether or not Bernanke will allude to it during his speech at Jackson Hole later this month. Wait. What's that you say? Bernanke isn't going to the Kansas City Fed's annual hootenanny in Wyoming this year? Something about being a lame duck? Oh well.
In all seriousness, it would be best for investors to come to grips with the fact that the end of QE will finally soon be upon us.
The good news is that the market seems to be accepting this fact -- albeit begrudgingly.
Sure, stocks are in the midst of a losing streak this week. The CNNMoney Fear & Greed Index even briefly slipped into Fear mode again. But this sell-off doesn't feel particularly scary, especially since it comes after the Dow and S&P 500 hit all-time highs last Friday. Both blue chip indexes are only about 1% below their peaks.
And the bond market isn't showing signs of Fed tapering panic either. The yield on the 10-year Treasury has pulled back to 2.59% from a 52-week high of 2.74% a week ago. Yields go down when investors are purchasing bonds.
If there really was an acute sense of anxiety in the fixed-income trenches, bond yields should be moving higher this week, not lower.
That's a good thing. Keep in mind that the only reason for the Fed to taper in the first place is because it thinks the economy, and the job market in particular, is actually on the mend.
The only reason for the Fed to delay tapering would be if the economy took a turn for the worse. That fact seems to get lost in all the obsessing over when the Fed will taper.
"The market doesn't yet recognize the potential for the economy and all the progress that has been made thus far," said Kristina Hooper, head of investment and client strategies for Allianz Global Investors.
And while last Friday's jobs report was a bit of a disappointment, the labor numbers are not all bad. The four-week average for initial jobless claims hit its lowest level since November 2007 today. That may sound wonky but it's noteworthy.
November 2007 is right before the recession began. Any data showing we've completely clawed back from the depths of that financial abyss is a good thing. What's more, the fact that this average is so low now is a sign that mass layoffs are on the decline.
It's also important to remember that the Fed will taper in gradual increments to ease the pain of QE's denouement. The Fed won't go from buying $85 billion in assets a month to zero in one fell swoop.
"Tapering could be a lot different than what's conventionally expected. It could be a tiny taper of just $5 to $10 billion a month instead of something bigger," Hooper said. "Clearly, the Fed is concerned about maintaining stability and not disrupting the markets."
(Tiny taper? I like it! Only reference I've seen for that term so far is for Tiny Taper candles at Williams-Sonoma. Also sounds like an Elton John song. "Hold me closer tiny taper!")
Hooper added that there will probably be more volatility between now and the inevitable tapering, as well as shortly after the announcement. But she's not predicting a market free-fall.
So don't believe some of the histrionic rants you might hear about how "The Market" is pooping the bed in anticipation of the Fed's imminent tapering. It just simply isn't happening.
"I'm not too worried about the possible end of QE. The concerns are overblown," said John Carey, portfolio manager with Pioneer Investments. "The jury is still out on what impact QE had other than a psychological one. It's not as important in the long run as a lot of people seem to feel."
Reader Comment of the Week! The only thing I like more than a good TV or movie reference is a fun music reference.
I started off the week lamenting the lack of any significant market and economic news by twisting the line of a famous song by the band that Stephen Stills and Neil Young were in before CSNY. A writer at investment news site Benzinga took it one brilliant step further.
Stop, hey, what's that sound? Everybody look at stocks goin' down!