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Let the Taper Begin

John P. Calamos Sr.

The Fed's announcement today that it would begin to slow its quantitative easing was met with a roar of approval from the stock markets. While there's no reason to anticipate a string of daily 250-point rises in the Dow, I'm optimistic about the longer-term benefits of the taper for the markets and economy.

We can be confident that the Fed is undertaking a deliberate and well-thought out plan. There's nothing reactionary about what's happening. Chairman Bernanke and his colleagues have latitude to work with, and they've stated their intention to keep the spigot on, maintaining a level of stimulus until a healthy degree of inflation kicks in.

In my view, there can be no doubt that the Fed's unprecedented easing did help move the U.S. economy through an extremely challenging time, but it also caused dislocations in asset valuations and discouraged banks from lending to small businesses and individuals. And even Chairman Bernanke noted that the taper has fallen short of what it set out to do. Inflation has been nearly flat, the velocity of money hasn’t picked up commensurately, and job growth has been measured.

Ultimately, the best fix for the problems that remain are pro-growth policies. A more normal interest rate environment should serve as a catalyst for increased credit access for small businesses, the engine of job growth. Over the past few years, people have increasingly thought of the Fed as the guiding hand of the markets and the economy, but this isn’t really the case. Of course, monetary policy has an impact, but it's only one piece in the puzzle; we also need sound fiscal policy. We can’t tax our way to economic growth.

The Fed's decision from taper talk to taper action affirms the slow—but more importantly, steady—economic recovery in the U.S. The good news seems to be getting better. The U.S. has been driving the global recovery, but we're starting to see a positive global synchronization among major economies. The emerging markets are regaining their traction. China does not look to be in a bubble; and the Chinese government is taking steps that support the economic freedoms that both support growth as well as investment opportunities. Europe is coming back, especially the northern economies. Economic conditions in Greece are also improving, with growth forecasted in 2014. This global synchronization is a positive for U.S. investors and markets, because the strengthening in international markets is not coming at the expense of a U.S. recovery. Instead, it can support it.

While my expectation is that U.S. and global equities will continue to move higher in this environment, I don’t believe that a rising tide will lift all boats. Successful investors have to do more than look at the market, you also have to look in the market. As tapering eases, I believe company fundamentals will play a greater role in stock prices. We're positioned (and have been) for this shift from yield to growth and growth cyclicals. This is an environment where we see considerable opportunities for long-term investors.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The information in this report should not be considered a recommendation to purchase or sell any particular security.


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