Wall Street's taper tantrum could lead to market selloff

Wall Street's taper tantrum could lead to market selloff

The Federal Reserve signaling its intent to demonetize its asset purchase program will likely result in a short-term market selloff, according to Goldman Sachs.

The Wall Street firm said it was likely that the Federal Reserve will lay the groundwork for scaling back its asset purchases at their September meeting in early 2022 before forging ahead with the plan in later months. Goldman expects the Fed to trim its asset purchases by $5 billion in Treasury securities and $10 billion in mortgage-backed securities each month.

In March 2020, the Fed pledged to reduce interest rates to near zero and slashed an unlimited number of assets in order to support the economy through the COVID - 19 pandemic. Since June 2020, the central bank has bought a total of $120 billion worth of private equity and mortgage securities a month.

Tapering sends an important market signal about the timing of liftoff, wrote a Goldman Sachs team led by David Kostin, the Chief U.S. equity strategist.

Goldman used the taper tantrum of 2013 that temporarily roiled markets as a template for what might happen this time around.

The S&P 500 fell 5% during a sharp five-day selloff as the benchmark 10-year Treasury yield jumped 40 basis points to 2.6%. Riskier parts of the markets outperformed defensive areas.

Two months later, the S&P 500 had rebounded by about 5% and ended the year 26% above the taper tantrum's low point.

The Goldman strategists said the size of the Fed's balance sheet and the pace of its modification have varying implications for the stock market performance, the former being more important for returns. The firm sees the S&P 500 range selling down to 4,300 in the next six months before reaching the 12-month target of 4,450.

Wall Street as a whole is increasingly concerned over the possibility of a pullback as the stock market heads into what is typically its weakest two-month stretch of the year.

The S&P 500 has not experienced a correction or decline of at least 10% since the selloff that began in August last and ended in October. Typically such a decline occurs at least once per year.

Strategy analysts worry that the recent emergence of the COVID- 19 Delta variant and slowing economic growth will serve as headwinds in coming months.

There are enough red flags that prudent investors should start considering de-risking, wrote Scott Minerd, head of global financial advisory at Guggenheim Partners.