The number of the day is 16.50. That’s where the CBOE Volatility Index sunk to this afternoon. We can thank Federal Reserve Chairman Jerome Powell and his merry band of central bankers. In a speech today, Powell told us what we already knew. The Federal Reserve will start tapering its bond purchases later this year. But the timetable was moved back further than most people anticipated.
And there likely will not be any changes in the timing of interest rates either. The Fed probably won’t start raising rates until at least 2023. Moreover, those rate hikes will likely be very small. I’d be stunned at this rate if the Fed gets back to “normalized” rates between 3% and 4% in the next five years.
How Tapering Will Work
Previous estimates suggested that the Fed would start cutting its purchases from $120 billion per month in September. The policy process is now likely to begin in December. An announcement is likely to come around the September meeting of the Fed Open Market Committee. I know that several members of the bank are anxious to get started.
I don’t think that the Fed is going to cut its asset-buying at the same pace as it did back in 2013. Remember, back then, the Fed was buying $80 billion in bonds each month. It scaled back its buying to zero in a little more than a year by cutting $10 billion here and there.
But here, I think the tapering will be about $5 billion per month… or occasional increases in buying if there is weakness in U.S. GDP. The Fed can send a clear signal as it did in March 2020, that it can provide support into perpetuity. Every delay injects a little more capital into the system… and that makes investors even more bullish. And we know that there is a solid relationship between the Fed’s balance sheet and the returns of the S&P 500. Have a look.
Today’s announcement didn’t just turbocharge the market again. It moved momentum directly into the green. We went from 54% of stocks trading under their 50-day moving average to just 45%. This is a boon for nano-cap, micro-cap, and small-cap stocks. And it gives us a direct line into taking advantage of strong-price trends.
This is still a bull market, even if the fundamentals look weaker than previous forecasts. We have to strike right now while the iron is hot. And that’s what I’ll be doing for my Surge Point Trader readers starting on Monday.