The “Kick-the-Can” Pattern Keeps Giving to Investors in September

September 23rd Weekly Market Update

The Federal Reserve (Fed) “kicked the can” on tapering by unexpectedly postponing any reduction in the $85 billion pace of monthly bond buying at its policy meeting last week (see this week’s Weekly Economic Commentary: Communication Breakdown). On Wednesday, the Fed said it needed more evidence of durable improvement in the economy and noted that a rise in interest rates threatened to slow the economy. Bond yields fell and stocks rallied, led by emerging markets (to understand why, see last week’s Weekly Market Commentary: Emerging Markets and the Fed — What’s Attractive and What to Avoid) and interest rate sensitive industries like housing stocks. The S&P 500 jumped to all-time highs on the news. By postponing tapering, the Fed added to the list of stock market-friendly actions to kick the can this month by those in Washington.

After kicking the can on neutralizing chemical weapons in Syria, a new Fed chairman with Bernanke’s term expiring in just four months, and now tapering, there are key issues this week that are next in line. Market participants had expected concrete actions on the aforementioned issues in September, leading to relief when instead Washington kicked the can. Markets are beginning to price in the threat that Washington may not kick the can in the upcoming fiscal fights.

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