Stocks were little changed on Monday as traders held off on any big moves ahead of Wednesday’s big decision from the Federal Reserve. At the conclusion of its latest two-day policy meeting, officials will decide whether to end the QE3 bond purchase program.
Other issues — from Ebola to troubles with the Apple Pay rollout and elections in Brazil and European bank stress tests — were all largely ignored.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 lost 0.2%, the Nasdaq Composite gained 0.1% and the Russell 2000 lost 0.1%.
Crude oil moved lower on indications OPEC isn’t in any hurry to cut production along with a bearish analyst note from Goldman Sachs. As a result, weakness in energy stocks sort of put a downer on the whole day as the Exxon Mobil Corporation (XOM) lost 0.8% — albeit well off of its early session lows.
Back to the decision on QE3.
This is kind of a big deal since the Fed’s steady dosage of stimulus, which started in late 2012, has been largely responsible or the market’s smooth, easy rise over the last two years. Moreover, when the Fed ended previous bond buying programs in 2010 and in 2011, market volatility increased and the economy weakened. The takeaway was that the stock market and the economy aren’t strong enough to breathe off of the ventilator, so to speak.
We’re about to find out if the third time is the charm.
Nervousness is high since the bond market suffered a “taper tantrum” early last year when the Fed first started talking about tapering down QE3 amid the improvement in the economy and the job market. Bond prices fell. Interest rates rose. Folks were unhappy. And the Fed blinked, surprising the markets by relaying the announcement of the tapering until December last year.
There’s been some chatter in recent weeks that maybe the Fed — cognizant of the recent stock market weakness, trouble in overseas economies, and the fact that inflation is below their 2% annual target — could surprise everyone again by stringing QE3 along for another month or two.
This seems to be the message being sent by the bond market, where interest-rate expectations over the next two years are well below the Fed’s own forecasts.
In the end, either the bond market is right and the Fed will need to keep the stimulus going for longer; or the bond market is wrong, and the Fed is going to tighten sooner than it expects.
Either way, the potential for a surprise — and a big market reaction — is very high.
Buckle up.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
