This is a very interesting comment from Bary Knapp at Barclays in his latest equity strategy note:
We believe it is too early to focus on Fed normalization/exit strategies; like each of the last three years, the Fed portfolio balance channel will remain wide open in 1Q. Still, by 2Q either it will be apparent that the fiscal multipliers on the recent tax hikes were greater than expected, leading to an equity market stall, or market participants and the Fed will both be reassessing whether it will be “appropriate to slow or stop purchases well before the end of 2013.”
In other words, the rally is running into one of two inevitable problems. Either the real economy will drag it back down. Or people will really start talking about the Fed heading to the exits, and the very early days of the tightening cycle.
Either way, stocks could be in trouble.
Of the two risks, Knapp is more concerned about the former, economic contraction. He notes that not only have taxes just gone up, at a time when GDP estimates have slowed, but that we’re in for another round of possible fiscal contraction, and that any “big deal” could include new revenues as well.
As it is, we’re already due for a very weak Q4 GDP print.
Bigger picture, we’re getting past the crisis era that defined 2007-2012. This doesn’t mean that stocks will be fine. It just means that stocks will see new kinds of risks that aren’t associated with tail-risk/collapse.
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