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August 19, 2013 - Renewed Tapering Fears Push Down Markets

August 19, 2013

Markets ended another week in the negative, pushed lower by mixed economic data and underlying fears about future Fed tapering. For the week, the S&P 500 lost 2.1%, the Dow lost 2.23% and the Nasdaq lost 1.57%.[1]

Some strong economic data fueled concerns that the Federal Reserve will start tapering bond purchases after its September FOMC meeting.The number of Americans filing for new unemployment claims fell to a near six-year low, indicating that job growth may have picked up in August.[2] U.S. retail sales rose in July, pointing to increasing consumer activity that could bolster economic activity this quarter.[3] Jobs growth and economic stability are two of the Fed's most important mandates and progress in this area would encourage tapering. 

On the other hand, some downbeat economic reports make tapering seem like less of a sure thing. New data indicates that industrial production was flat in July and factory activity slowed significantly in the Mid-Atlantic region, suggesting that the manufacturing recovery may be stalling.[4] Consumer sentiment also took a hit in August as Americans braced for higher interest rates and slower economic growth.[5]

Highlighting the need for more clarity, two top Fed officials cautioned against immediate tapering by suggesting that the Fed needs to digest more economic data before making a decision next month. Dennis Lockhart, the Atlanta Fed President, did not rule out some kind of decrease in bond purchases in September, but he characterized it as a "cautious first step" rather than the start of a steady pullback in quantitative easing.[6]

To attempt to sum up all of the rumors, analysis, and official statements: The Fed is under a great deal of pressure to begin tapering, but economic data is still mixed and isn't giving the Fed the clear picture it needs to make major decisions. It's possible that some initial steps towards reducing bond purchases will be made next month, but future tapering may not follow if economic data doesn't support additional reductions.

It's hard to know amid all the uncertainty which way markets will move in the near term, but more volatility is likely. While stocks have lost ground over the last two weeks, it's important to remember that markets are still up significantly for the year: The S&P 500 has gained over 16% since the beginning of the year and the Dow is up 15%. While it can be hard to watch investments lose value, it's important to stay focused on the long-term. As always, we'll continue monitoring the situation and keep you updated.

Wednesday: Existing Home Sales, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, PMI Manufacturing Index Flash
Friday: New Home Sales 

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. 

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. 

The Nasdaq is a computerized system that facilitates trading and provides price quotations on some 5,000 of the more actively traded over-the-counter stock.