As I’ve talked about before, the market has appeared ready for a rest and it took another step in that direction Wednesday and Thursday with a sharp drop across the major indexes. The main culprit was a provisional budget deal out of Washington that reignited concerns the Federal Reserve will announce a quantitative easing (QE) pullback during its meeting next week.
The Fed’s tapering timeline remains one of the biggest year-end question marks. Last week’s economic releases showed some encouraging signs: 203,000 new jobs in November, alongside a decline in the unemployment rate to 7.0%. This kind of data supports a pullback, which is why investors will keep an ear out during the final policy meeting of the year next week.
Whenever the Fed decides to pull the trigger, it is at least largely expected that tapering will be in place by the middle of next year at the latest, not long after Janet Yellen takes over the central bank. That means that rates may rise, albeit off of extremely low levels that have been the hallmark of the past several years. It also means the stock market will not have the tailwind of low rates at its back in 2014 and beyond, forcing investors, if they have not done so already, to have to have a laser-like focus on analyzing names that are worth holding.
Stocks will need to take a breather after this year’s large gains, and that means the beginning of next year could be a bumpy ride.