By Victor Reklaitis, MarketWatch
U.S. stock investors shouldn't be fazed if the much-anticipated "Septaper" hits this coming week.
Strategists have said markets are now pricing in a decision by the Federal Reserve to start scaling back its bond
purchases when it concludes a two-day policy meeting Wednesday.
In fact, much of the back-and-forth among financial forecasters in the past week has centered on how much the Fed will
Doug Coté, chief market strategist at ING U.S. Investment Management, said he expects the central bank to
announce a "full taper" on Wednesday. That means a reduction of about $20 billion in the Fed's monthly bond buys, he
said. Each month, the central bank has been purchasing $85 billion worth of Treasurys and mortgage-backed securities.
(Read more: Besides the taper, 5 things to watch at the Fed http://www.marketwatch.com/story/besides-the-taper-5-
Such a move would be "a very positive message to the market, and I think it would be 'buy on the news,'" Coté
told Marketwatch. He thinks that stocks are "poised to accelerate from here."
The consensus view among economists is also for a September taper, but by a smaller amount--$15 billion. That's
according to a recent Wall Street Journal survey. Out of 47 respondents, 66% said they expect the Fed to announce a
reduction on Wednesday. On Monday, Goldman Sachs' Jan Hatzius said he expects a "dovish taper."
If the Fed's announcement roughly matches expectations, look for stocks to continue to "cautiously rally," said Quincy
Krosby, a market strategist at Prudential Financial.
What the Fed does at this next meeting has dominated trading desks and investing chatrooms for months. It's no
surprise. The game-changing foray by the Fed into the private capital markets--a gambit designed to jolt lending and
jobs growth back to life during the worst recession since the Great Depression--has been accompanied by a powerful bull
Since the Fed started its first round of quantitative easing bond purchases in late November 2008, the S&P 500 (SPX)
has rallied more than 96%. From its bear-market low in 2009, it's gained about 150%. It's off about 1% from its record
high reached in early August.
Still, stocks have come back a bit recently. In the past week, the Dow Jones Industrial Average (DJI) gained 3%, its
best week since January. The S&P 500 rose 2%, and the Nasdaq Composite (RIXF) added 1.7%. In the year to date, the S&P
500 is up 18%, the Dow 17% and the Nasdaq 23%
What if there's a delay?
There could be a surprise, of course, and plenty of stock pickers and economists say the move to back away from
extraordinary stimulus measures is more likely in October or December.
No decision to reduce bond purchases might provide a lift for a few hours, but it could be a negative for stocks on a
longer time frame.
"There might be a short-lived pop, but I believe once the market digests it, (stocks) would then sell off," said
ING's Coté. Yes, the Fed's bond buys have helped fuel the stock market's recovery. But such a delay would indicate
the Fed sees storm clouds and has a worse-than-expected economic outlook for the U.S. and the world, Coté said
At the other end of the spectrum, a bigger-than-expected taper would hurt equities in the short term, according to
Prudential Financial's Krosby. If the Fed opted for a reduction of $50 billion, "the knee-jerk, initial reaction in the
market is a selloff," she said. REITs and housing-related stocks would especially get hit, Krosby said.
But she added that she doesn't expect that kind of move, as Fed chief Ben Bernanke and other policymakers want to be
careful and avoid market volatility. If there is volatility on Wednesday's news, some Federal Reserve officials -- St.
Louis Fed President James Bullard, Kansas City Fed President Esther George and Fed. Gov. Daniel Tarullo and -- are
scheduled to speak Friday and could provide more details on the Fed's latest thinking.
"If there's any misinterpretation, you have that parade of speakers on Friday to try to assuage the market," Krosby
Some sectors are expected to do better than others if the Fed sticks to the script the market is writing.
If the Fed announces a modest scaleback, investors should consider small caps and mid-caps or areas like technology,
while avoiding bond proxies like utilities and telecoms, two S&P 500 sectors that are already underperforming this year.
Home builders and other housing market-related stocks could show strength in particular, as long as the central bank
signals it's handling mortgage-backed securities delicately, Krosby added. She said such stocks might slip initially,
but then get a lift from confirmation the Fed is being "careful with housing."
Strategists have cautioned that even if the "Septaper" doesn't come to pass, there's no question a reduction will
happen by October or at least by year's end.
For longer-term investors, it's "completely irrelevant as to whether we get it in September or October," said Scott
Wallace, founder and chief investment officer at Ranger Asset Management and previously a portfolio manager at
AllianceBernstein. He added that the Fed sent its first signal about tapering in late May, and the stock market has been
showing it's "comfortable" with the changing environment.
Wallace said investors should underweight utilities, telecoms and "anything that has a yield orientation," and instead
"lean toward the more bullish side of the equation." He said investors generally are "quick to see negatives" as the
financial crisis still looms large, even though it's been five years since Lehman Brothers failed.
"Investors are overpaying for the perception of safety," Wallace told MarketWatch. Some of that mis-pricing already
has been corrected this year, but "there's more work to be done," he said.
It's a big data week, too
Beyond the Fed meeting, this week's economic releases will include a reading on U.S. industrial production on Monday,
new data on consumer prices on Tuesday and several items Thursday: the Philly Fed survey, existing-home sales and weekly
General Mills Inc. ( GIS ) , FedEx Corp.( FDX ) and Oracle Corp.( ORCL ) are among the companies slated to report earnings
during the week.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
Copyright (c) 2013 Dow Jones & Company, Inc.