Markets Remain Resilient, But More Volatility Lies Ahead

Stocks were again impressively resilient over the past week, as the Fed generally meeting expectations for tapering helped investors look past the multiple sources of volatility emanating from China. And we think that last week’s price action fully reinforces the point we have been making for a while now: Markets are likely going to get more volatile, but volatility does not automatically mean a correction.

 As we started last week, there were three major unknowns that would be resolved in the coming weeks: Fed tapering schedule, Washington budget issues, and the state of corporate earnings.

 Positively, the Fed met market expectations on tapering and rate hikes, and if economic data doesn’t roll over hard and inflation doesn’t spike, then Fed policy will generally support asset markets (although it won’t, by itself, cause a rally).

 Now, there are two major unknowns that can still cause volatility (and we expect they will): Washington and earnings.