Syria, Fed Speculation to Drive Stock Market
Tapering of economic stimulus should be seen as a return to economic normalcy.
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The stock market could experience some initial volatility as traders and investors hone in on the ongoing saga in Syria and speculation of Federal Reserve tapering its bond purchasing later this month.
Last Friday, the Dow Jones Industrial Average ended the trading day flat but not without some early volatility. Overall, all three major indices were slightly higher last week, with the Dow up 0.8 percent, S&P 500 up 1.4 percent, and Nasdaq up 2 percent.
Syria Action Should be Temporary
President Obama will look to gather support in Congress, which returns from recess this week, for a military strike in Syria. While any strike is likely to be minor, war is usually anathema to the financial markets. Last Friday, Brent crude futures for October delivery rose 22 cents to $115.48 a barrel, while WTI crude futures rose 34 cents to $108.71.
Oil should continue to rise due to supply concerns as long as Syria tensions persist, and gold prices will increase due to emerging market demand for a safe haven. But unless area tensions exacerbate and spread to the greater Middle East, the strikes will spook investors initially but the effects should be temporary.
Fed Taper Good for Markets?
The amount and timing of Fed’s potential reduction of its ongoing asset purchases could have larger effects on the financial markets.
Last Friday’s jobs report showed that U.S. payrolls rose 169,000 in August, which was less than projected by analysts. July jobs gains were also revised down to 104,000. Economists surveyed by Bloomberg expected 180,000 new jobs last month.
Some analysts think that the tepid jobs report—a sign that economic recovery isn’t completely on solid footing—could delay Fed’s decision to decrease asset purchases. But most believe that the Fed will at least begin to reduce a portion of the $85 billion-per-month asset purchase.
Regardless, any tapering of economic stimulus should be seen as a return to economic normalcy, not as a penalization of stock market investors.
“We believe it is important to grasp that less accommodative Fed policies typically signals stronger economic growth and by association better stock market prospects,” wrote BMO Capital Markets in a Sept. 6 research note to clients.
“As such, stock market performance traditionally recovers quickly following associated rate hikes. Therefore, any selloff in response to a lessening of Fed QE bond purchases should be viewed as an excellent buying opportunity.”
Frank Yu is a contributor to the Epoch Times.