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“Of all the hardships a person had to face, none was more punishing than the simple act of waiting” – Khaled Hosseini, A Thousand Splendid Suns

Now the waiting is over, the much anticipated US Tapering will come into effect starting from January 2014. The Fed has decided to taper its quantitative easing policy by $10 billion per month, from US$85 billion to US$75 billion. Chairman Ben Bernanke expects the program to wind down steadily through 2014 and conclude by year-end, assuming the economy remains healthy.

Just to make sure, investors are hearing them loud and clear, the Federal Reserve said β€œit would reduce its monthly asset purchases…and it likely will be appropriate to keep overnight rates near zero well past the time that the US jobless rate falls below 6.5%”.

Did the dooms day come like what the “industry expert” forecasted? Not at all!

Developed Stock markets are up, the US dollar is stronger, US 10 year Treasuries is unchanged, and the VIX (volatility index) is down. Only Asia and Emerging markets have suffered in response to rate rises and a stronger US dollar. In fact, if you compare MSCI Emerging Market Index (represented by EEM) and S&P 500 Index (represented by SPY). It looks disturbing.

Emerging Market Index vs S&P 500 Index
Emerging Market Index vs S&P 500 Index

Would it be the anticipation is more punishing than the event itself?

The sharp selloff we have witnessed this year may be reminiscent of the Emerging market selloff in the second quarter of 2004, as can be seen from the chart below.

On contrary to the traditional belief that high interest is bad for stock markets, stock markets became positively correlated with the sequential rate increases, and rose in spite of the US dollar strengthening in tandem too.

fed-rate-vs-em-index-2004

Maybe as Vanguard has commented recently, Tapering is good news for long-term investors.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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