All Eyes on Fed Tapering: Bad News is Good News for the S&P 500

As we continue to witness a never-ending bull market in U.S. equities – having recently made all time highs in the S&P 500 and DOW indices – many investors are beginning to wonder what is driving the market up.  While many companies have divulged promising news this year, the overall economic health seems to remain stagnant or marginally better, at best.  The overall consensus seems to be that there is not “enough” positive news floating in the economic landscape to warrant the recent bullishness of the stock market.  All indications over the last few months seem to hold the Federal Reserve’s monetary policy culpable for the bullish trend in the markets. But what actions has the Fed taken recently to instill so much confidence into the equity market of a sluggish economy?

The simple answer to that question is: it is the lack of any changes in the Fed’s monetary policy that is helping maintain confidence in the markets.  The Fed’s bond buying program, a topic heavily discussed in global economic news, has remained intact and unchanged.  The Quantitative Easing (QE) stimulus remains steady at $85 billion in bond purchases a month, and that makes investors comfortable knowing the government will continue to flood money into the economy.  The markets favor QE, and as long as there are no imminent signs of tapering, it is very likely the current bullish trend will continue.

In a recent conversation with Ari Siegel, the head trader at Turning Wheel Capital, Mr. Siegel states “we’re in an environment where bad news is actually good news for the S&P 500.” While that statement from Mr. Siegel may seem counterintuitive, the concept is actually fairly simple to understand. All the economic indicators over the last year have shown sluggish to moderate improvements to the economy.  If the economic recovery continues its “sluggish” place, then the Fed has no reason to taper QE from its current pace of $85 billion, keeping investors confident and bullish towards the equity markets.

In the coming months, it is likely that most stock market volatility will come from the Fed’s announcements of future  plans for QE or from any major developments (either positive or negative) in common economic indicators.  Good economic news may in fact lead to a sell-off in the market, as investors expect that good news to lead to tapering by the Fed.  Bad news would mean the current QE pace will continue for the unforeseeable future.