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Stocks Soar to Record Highs

January 7, 2014

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Before the FOMC meeting, I gave three reasons why I didn’t think the Fed would taper in 2013. I was wrong. But it doesn’t matter because the stock market soared to fresh record highs, erased two down weeks in one day and is acting as if the Fed didn’t taper.

The market’s initial reaction was one of shock and uncertainty as the market fell. But as the market digested the news it was clear that this was the beginning of the much awaited (and healthy) transition of the Fed handing the ball off to the economy.

The Fed tapered quantitative easing (QE) by $10 billion per month. The Fed will now print $75 billion each month instead of $85 billion. Or, instead of printing $5 billion per day it will now be printing $3.75 billion per day, which is still very bullish for stocks. The Fed made it abundantly clear that it will continue to support the economy and will remain data dependent. So if the economy slows and they need to increase QE, they will.

In a perfect world, the Fed wants one of two scenarios to occur: either the economy grows on its own or the Fed continues printing until the economy can grow on its own. Both scenarios are bullish for stocks. Put simply, the Fed is still expanding its balance sheet and printing billions of dollars each day to support the system, which means the fundamental bullish backdrop remains in place for stocks and technically, the action remains very healthy.

As we have been saying all year, the market is strong in all three time-frames: short, intermediate and long. The last pullback was shallow in size (by percent in decline) and scope (days or weeks, not months). For weeks, we have been saying, the market will pullback, and it is just a matter of when, not if. That is exactly what happened.

 

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

 

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