Wednesday, December 18, 2013
Stock Market: Celebrating The Taper
1. This announcement - and the taper - was already priced in. In the last 4 weeks the stock market went nowhere and has been crumbling since start of December in spite of strong economic numbers.
2. The taper is a sign of economic strength. Today´s announcement is an an acknowledgment that the US economy doesn`t need the stimulus any more (or at least less). The economic data (job market, retail sales, industrial production, home prices and more ) show that the economy is getting stronger.
3. The stock market isn´t afraid of rising interest rates. Stock prices (value of the company) depend on expected company profits, discounted with the interest rate. Higher interest rates imply a bigger discount. Everything equal this translates into a lesser value of the stock. But we live in a world where nothing stays equal. A stronger economic growth also implies that company profits will be higher and will rise faster, thus over-compensating the negative impulse from the interest rates rise.
I believe that today´s taper announcement set the course for the next stage of the rally.