Sign in / Join Now
Taper Or Not, Stocks And Bonds Could Gain
BOOKMARKED / READ LATER
Bookmarked
Added to your bookmarks on the Seeking Alpha homepage
Remove Bookmark
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
There is a fairly low chance U.S. interest rates will rise meaningfully in the near term. Indeed, I expect yields will decline from the current level of about 2.7 percent on the 10-year U.S. Treasury note. U.S. housing activity stalls when interest rates reach 3 percent, and I maintain my view that there remains an absolute ceiling of between 3-3.5 percent for the 10-year Treasury.The Fed has told us that its decision on slowing its program of quantitative easing (QE) will depend on economic improvement, and economic data has been and will likely continue to be mixed. The market, then, is driven by expectations about QE, but uncertain as to what indicator is most important. Having said that, however, there is one thing I can state with complete certainty: we will taper or we will not taper, and either path can lead to a bullish outcome.
If the Fed decides to taper its asset purchases, it will be because the U.S. economy is strengthening. A stronger economy translates into lower corporate default rates and tighter credit spreads. If the Fed does not taper, then the continued injection of liquidity into the economy will support prices for risk assets, and credit spreads will tighten.
Equities, as the first cousin of credit, face the same road map. If tapering occurs, then the economy is strengthening, and that should be good for earnings and also good for equities. Conversely, if tapering is delayed, all risk assets, including equities, will continue to be buoyed by QE's added liquidity. International equities remain well-positioned for stronger gains and the recent reduction in the European Central Bank's benchmark rate to an all-time low of 0.25 percent further enhances the outlook for European stocks.
U.S. Equity Valuations Not a Bubble Yet
BOOKMARKED / READ
