How Central Bank Tapering Could Impact the Stock Market

The big economic news this week was that the European Central Bank (ECB) decided yesterday to reduce its $2.2 trillion bond-buying program at a “moderately lower pace” as the economy bounces back to life and inflation takes hold in the eurozone.

However, ECB President Christine Lagarde was careful about the phrasing when she spoke to reporters after the meeting. “The lady isn’t tapering,” she said. Instead, the decision is a “… recalibration of the pandemic emergency purchase program for the next three months.”

ECB officials also said they’d keep the bond-buying program, which began in March 2020, going until March 2022 or later. The bank will keep interest rates at 0%, while the deposit rate will stay at negative 0.5%.

While details are still emerging, The Wall Street Journal said the ECB could scale back its purchases of eurozone debt to €60 billion to €70 billion per month, compared to the current rate of about €80 billion a month.

The bank also revised its eurozone 2021 GDP forecast upward in September to 5.0% from 4.6% in June.

Interestingly, inflation in the eurozone ticked up to 3% in August, well over the ECB’s goal of 2% and the highest level the 19-country block has seen in nearly a decade. Household spending is behind most of the eurozone’s recent economic growth, though the overall economy is roughly 3% smaller than it was before the pandemic.

The problem is that the ECB recently increased its quantitative easing policies. Bank officials in July said they could look past short-term rises in inflation and would raise interest rates only when it was clear the annual inflation rate would hit 2% or higher and stay that way for the medium term.

And that’s just what it did.

In July and August, the ECB ramped up its bond purchases to $160 billion worth of government bonds, well over the net supply of the $105 billion worth of government bonds issued by Italy, Germany, France and Spain meant to stimulate the economy impacted by the pandemic.

So, in my opinion, the ECB is not being very transparent. The ECB President, Christine Lagarde, is the former head of the International Monetary Fund and is an expert in “kicking the can down the road.”  A day of reckoning may be forthcoming for the ECB and its endless money printing via Modern Monetary Theory (MMT).

Essentially, because the ECB will begin “tapering,” I now expect that the Federal Reserve will announce the same thing in its September 22nd Federal Open Market Committee (FOMC) statement. This will effectively put the ECB and Fed in “synch.”

Speaking of which, the Fed on Wednesday released its Beige Book survey in preparation for its upcoming FOMC meeting and stated that economic growth “downshifted” in August as Covid-19 cases resurged due to the Delta variant and led to a pullback in dining out, travel and tourism.

The Beige Book survey also noted that labor markets are tight and that “Inflation was reported to be steady at an elevated pace.” Indeed, the Producer Price Index (PPI) from the Labor Department rose 0.7% in August, increasing 8.3%, year-over-year, and notching the biggest annual increase since November 2010.

The Fed cited supply chain bottlenecks for continued inflation pressure. Overall, the Beige Book survey was dovish, so it will be interesting if the Fed will kick its tapering decision down the road due to slowing economic growth.

The truth of the matter is, due to massive budget deficits for many eurozone countries, raising interest rates may no longer be an option for the ECB. The same could be said for the Fed here in the U.S.

As a result, the “Goldilocks” environment of ultralow interest rates, an accommodative central bank and robust economic growth is likely to persist and should continue to support higher stock prices.

Will September Finish Strong?

I’ve warned regular readers that September is historically the weakest month of the year for the stock market, and we’ve seen some of that weakness manifest this week, as the Dow and S&P 500 tallied drops Tuesday through Thursday.

But the momentum began shifting today and the good news is that liquidity tends to improve around mid-month when folks in Europe and on Wall Street return from their extended summer vacations. My fundamentally superior stocks also tend to firm up just in time for the fourth quarter.

See, my Platinum Growth Club Model Portfolio stocks represent the crème de la crème and often benefit from the “forced” institutional buying pressure at the end of the quarter. That’s when quarter-end window dressing and the 90-day ETF rebalancing take place and tend to send my fundamentally superior stocks higher.

The reality is that my Platinum Growth Club Model Portfolio stocks remain characterized by superior fundamentals at a time when earnings momentum is slowing down for a lot of S&P 500 companies.

This includes the five new stocks with accelerating earnings momentum and robust buying pressure I added in my Platinum Growth Club September Monthly Issue, published last Wednesday. (Click here now for my full recommendations.)

I’ve also recommended a host of new stocks (and LEAPS call options, or Long-Term Equity Anticipation Securities) in the past few days. I recently added two new high-quality stocks in Accelerated Profits, four stocks in my Breakthrough Stocks Monthly Issue and two new LEAPS call options trade in my Power Options service Thursday, as well as four stocks in my Growth Investor Monthly Issue for September in late August – all of which my Platinum Growth Club subscribers have full access to.

All told, I have more than 100 stocks across all of my services across all of my services and nearly 50 LEAPS call options, and each and every one boasts strong sales and earnings growth. Of course, you don’t have to invest in all 100-plus stocks. If you’d rather start small, I’ve got you covered there, too. My Platinum Growth Club service comes with my exclusive Model Portfolio.

As I discussed, these stocks represent the crème de la crème. I handpick all of my Model Portfolio recommendations from my different stock services – Growth InvestorBreakthrough Stocks and Accelerated Profits – so you can rest assured that you’re investing in the best of the best.

And if you do decide to sign up, you couldn’t have picked a better time. In addition to having instant access to every recommendation, Weekly Update, Monthly Issue, Trade Alert and Market Alert I’ve issued, you’ll also be signing up just in time for my Platinum Growth Club Live Chat event for September, which I will be holding Monday, September 13, at 12 p.m.

I will be covering a wide range of topics, including my latest thoughts on the market, updates on several Platinum Growth Club Model Portfolio stocks and much, much more. Plus, I will take Platinum Growth Club subscriber questions live at the end of the event, and those who send me questions early will get to jump ahead of the line. So, if you have any questions, sign up now and send them over!

Simply click here and sign up now.

Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

 

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