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If the winding up of QE starts next week then we have just seen the start of a major US stock market correction

Posted on 15 December 2013 with no comments from readers

With market optimism and complacency at a record high along with stock prices the correction that started last week with the worst five days for stocks since August is going to morph into a far bigger correction this week if the Federal Reserve finally announces that it is winding up its QE money printing program.

Last week the S&P 500 fell 1.6 per cent to 1,775 after closing at an all-time high of 1,808 on December 9th, up more than 24 per cent in 2013, set for its best yearly gain in a decade. The Dow Jones Index shed 264 or 1.7 per cent, to 15,755.

Mean Old Santa?

Not exactly a rout after such a record run. But the higher you fly the harder you fall, and that’s what comes next unless the Fed decides to give Wall Street a Christmas present next week.

However, the Fed probably feels it ought to start bringing this highly inflationary period for asset prices to a close. The risk to the real economy is a spillover into consumer price inflation that the official figures say has not happened. The punch bowl for next year will still be there but smaller and less intoxicating.

The Vix index of volatility jumped 14 per cent to 15.8 over the past week. Standby for a rollercoaster ride as an overinflated stock market deflates a little in size, or a lot if things get out of hand.

On the other hand, the Fed could choose to be cautious and give Wall Street one last party for Christmas.

Posted on 15 December 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Investment Gurus, Private Equity, Sovereign Wealth Funds, US Stocks

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