More Uncertainty in a Seasonally Weak Period

Zacks

Tuesday, August 27, 2013

Syria jitters have added to the perennial Fed Taper issue for the market, though the Syria situation is unlikely to morph into become a full-blown war any time soon. That said, this issue adds another element of uncertainty in this seasonally low-volume period for the stock market ahead of the Labor Day weekend.

There are no good solutions to the Syria problem. From the perspective of strategic U.S. interests, victory for either side in the Syrian civil war is problematic. This is the primary reason, in addition to war-weariness in the country, why the U.S. hasn’t intervened already, despite the enormous human cost of the conflict. For the sake American credibility in the region, particularly given the ongoing conflict with Iran, the Obama administration needs to be seen to ‘punish’ the Assad regime for using chemical weapons on its own people. But I would be surprised if the ‘punishment’ is anything more than a few missile hits to Assad regime assets.

What this means is that there will be more noise and saber rattling than actual military action any time soon, which means more fog and uncertainty for the markets. The Syrian situation adds to existing sources of uncertainty about a potentially destabilizing replay of the 2011 debt ceiling debate and the future of the Fed’s easy money policy. The leadership transition at the Fed adds to this mix of uncertainty.

My sense is that the market is smart enough to see through the partisan and acrimonious debt ceiling debate and price in an eventual last-minute resolution along the lines of the Fiscal Cliff and Sequester. The Taper issue is potentially more material as it could signify a change in the Fed’s monetary policy stance. The sharp rise in bond yields over the last three months confirms that the bond market sees the Taper question as the start of monetary policy normalization.

The Fed has been a pillar of support in the stock market’s rise to recent all-time high levels. Given the Fed's critical role all along, it is reasonable to doubt the sustainability of the stock market momentum in a backdrop of rising bond yields and lack of earnings power.

Sheraz Mian
Director of Research

 

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