Just two trading days are in the books this month, but thus far, stocks are bucking September’s reputation as the worst month of the year for the bulls. The cautionary tale is that two days do not make a trend. Just as important, the Federal Reserve’s September meeting kicks-off in less than two weeks and concern is rising that this will be the month that Ben Bernanke and friends finally and formally announce tapering of quantitative easing.
Decent to strong U.S. economic data supports the notion that the Fed does have room to begin trimming its $85 billion in monthly bond purchases. That deal could be all but sealed if the August jobs report due out this Friday, is strong. On Wednesday, the Fed’s Beige Book report noted “modest to moderate pace” regarding U.S. economic growth with improvement seen across all 12 Fed regions.
With a balance sheet just shy of $3.7 trillion, the Fed and Chairman Ben Bernanke have begun to contemplate an exit at least from the bond-buying aspect of its historically aggressive monetary easing, reports Jeff Cox for CNBC.
Going back to late May, the mere mention of tapering has served to roil asset classes ranging from emerging markets equities, debt and currencies to income-generating favorites such as MLPs, REITS and the utilities sector. REIT funds such as the Vanguard REIT ETF (NYSEArca: VNQ) have taken a beating as investors push rates higher in anticipation of the Federal Reserve reversing its accommodative stance. [Rising Interest Rates Pull REIT ETFs Toward Bear Market]
Concerns regarding the end of easy U.S. money have punished emerging markets bond ETFs, both the dollar-denominated and local currency funds, along with scores of developing world currencies. Currencies, including the Indian rupee and Indonesian rupiah, have made either multi-year or all-time lows due in part to amplified speculation that the Fed is preparing to shut-off its easy money spigot. [EM Bond ETFs Slammed by August Outflows]
Tapering in September could make a historically rough month for stocks even worse. September is the worst month of the year for S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Russell 1000. Since 1950, the Dow’s average September loss is nearly 1%, more than double the average loss in June, the next worst month for the blue-chip index.
There is some hope for the Dow remaining durable if confirmed tapering causes Treasury yields to further rise. The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), the Dow tracking ETF, allocates almost 34% of its weight to industrial and discretionary names. Discretionary and industrials, in that order, are the two top-performing sectors in rising rate environments.
SPDR Dow Jones Industrial Average ETF
ETF Trends editorial team contributed to this article.