As Sam Sees It: Will the Fed’s Taper Decision Trigger a Santa Claus Rally?

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

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EQ: The Federal Reserve announced earlier this week that it would finally begin its tapering in January. Surprisingly, the market spiked higher immediately following the news. Why did the market take the news so well?

Stovall: The market actually declined immediately after the Fed made the announcement. The S&P 500 was off by about 13 points, but then things quickly turned around. I guess there were preprogramed trades that were set to sell off if the taper was announced, but then investors read the actual statement and decided that maybe it wasn’t such a bad thing.

I think what caused investors to feel a little bit better was that, first off, it lifted the uncertainty as to the timing of when the taper would take place. Now we don’t have to worry about it because we know we’re in a tapering environment. Also, I think that investors realized that if the Fed was willing to do this before the Christmas holiday—still with some important retail days ahead of it—that maybe the economy is strong enough to withstand the removal of a token amount of stimulus.

Also, the Fed lowered what it would regard a key threshold in the unemployment rate, below which they would consider raising short-term interest rates. In general, with the commentary being quite dovish, it implies that the Fed is not looking to take the punch bowl away—if you will—and are not necessarily looking to slow the economy. They’re simply trying to find a way to unwind the stimulus that is apparently no longer needed.

EQ: How would you rate the job the Fed has done in telegraphing its policy moves to the market and managing expectations?

Stovall: Well, the prior Fed policies were to keep people in the dark and I think Alan Greenspan tried to give the impression that he told us a lot, but he said it in Greenspanese, which nobody seemed to understand. So that was, by itself, a lack of clarity.

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The Bernanke-led Federal Reserve seems to try to focus on clarity, but I think what happens is, people end up getting too much clarity or get confused by the clarity. The reason is because while the overriding message is that everything is data-dependent, you do have the ability of FOMC members to state their opinion as to when they believe that tapering should start and by how much. In many cases, one member will be in disagreement with another.

I don’t know if that was a planned series of trial balloons, or just Bernanke giving each of the members freedom to speak their own mind, but I actually believe that the increased attempt at clarity ended up just maintaining a certain level of confusion.

EQ: As you noted in this week’s Sector Watch, this December has been uncharacteristically down thus far. We’re essentially flat on the month after the early dip, but now that the cloud of the taper has cleared a bit for the market, will we see a rally to close out 2013?

Stovall: I think we are. The Stock Trader’s Almanac refers quite frequently to the mid-December low. Certainly, with Dec. 18 being close to the middle of the month, I think that would count. So, now the real question is whether investors are in the mindset to add to positions within the market, and I believe that they are.

I would tend to expect that we see a creep higher in equity prices and December ends up being a positive month overall.

EQ: You also noted that investors—particularly those interested in dividend stocks—may be able to find opportunities right now. Should they not be shying away from higher-yielding dividend stocks?

Stovall: I think that certainly higher-yielding stocks are going to be increasingly at a disadvantage as interest rates rise, and are likelier to be underperformers as compared with the more cyclical stocks. Stocks in general will do well in 2014. We are expecting it to be a good year, but not necessarily a great year, and with interest rates likely to be on the rise next year, equities in general could benefit, and probably the more cyclical sectors will benefit more than the defensive or higher-yielding sectors.

I would say that those who are in need of income and look to dividend-paying stocks should continue to do so. Just don’t overpay for them and realize that they might not be the leaders that they were earlier in this bull market.

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