The euphoria surrounding the unexpected decision by the Fed not to taper-off their bond buying program sent stocks rallying to new, all-time highs on Wednesday last week, with the S&P 500 reaching 1,725. Since then, however, stocks have faded, losing more than 1.5% in the past two trading sessions. We reached an intraday low of 1,695 this morning, before stocks mounted a rebound, and we are currently at 1,705, which is exactly where we closed last Tuesday – the day immediately prior to the Fed decision. In essence stocks have erased the entire no-taper rally in short order.
Where do we go from here?
This is always the toughest question to answer, but given that we are in the worst month of the year for stock performance, and thus far stocks have held-up well this month, it stand to reason that further downside is likely. October has historically been better than September for stocks, but it is also the month in which we have seen big crashes, including the October 1929 crash that led into the Great Depression, the October 1987 crash in which stock lost more than 30%, and the October 2008 drop after Lehman Brothers failed and financial markets imploded. Will we have another crash next month? It is hard to say at this point, and we have no indication that investors have lost faith in stocks. However, the Fed has only two meeting remaining in 2013 – October and November. They have stated repeatedly that they will begin to taper by the end of this year, so we should see tapering begin in either October or November. If this occurs in October, it could serve as a trigger to unleash a sizable correction, or possibly even a crash. I am not expecting a crash, although it would not surprise me to see one. It would be more likely to see a 10% to 20% correction, initiated by a sizable shock of 3% or more, or about 50 points or more for the S&P 500. A shock such as this would provide investors with an action point from which to make a decision to sell.