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Investing Specialists

A Very Different Kind of Retail Holiday Season

Consumers are buying, but not everything that retailers are selling, writes Morningstar's Bob Johnson.

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Markets greeted great economic news and a very palatable budget settlement with a 1.7% decline in the S&P 500 (one of its worst showings in several months) and a rise in the 10-year Treasury bond yield, to 2.88%. Obviously, good news resumed its position as market bad news. An improving economy and now a budget settlement substantially raise the odds of an early end to the Federal Reserve's purchases of bonds and mortgages. Recall that the lack of a budget settlement was part of the stated reason for delaying the tapering program in September. Now with the budget deal settled, one of the excuses for keeping bond buying going is eliminated. Then this week's fantastic retail sales report, along with last week's better-than-expected employment report, makes it harder to make the argument for continued purchases.

I am going to stay out of the day-to-day betting on the tapering date. (I don't need to know because I am not a day trader.) Whether it starts tapering now or in June, it doesn't make any difference to long-term bondholders or long-term equityholders. I can say with some confidence that tapering will begin by June and maybe wrap up near year-end unless the economy makes a surprise swoon or some geopolitical event upsets the applecart. With low inflation rates, I don't think 10-year rates have all that much more to go up from their current 2.88% rate. That is already a huge move from their 1.4% low, but not that far off the 3.5% rate that current low inflation rates might suggest.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.