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U.S. stocks may fall again as Fed stays course

Jan 25 2014, 13:41 IST
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Wall Street managed to avoid major selloffs in 2013, but bears look ready - and anxious - to take command. Wall Street managed to avoid major selloffs in 2013, but bears look ready - and anxious - to take command.
SummaryFed's plan to gradually withdraw its stimulus has long been expected to lead to a pullout from emerging markets.

Wall Street managed to avoid major selloffs in 2013, but bears look ready - and anxious - to take command.

U.S. stocks could be set for another selloff next week as the Federal Reserve is expected to announce it will keep withdrawing its economic stimulus, further pressuring equities already roiled by a flight from emerging markets.

Investor sentiment turned strongly bearish this week as emerging markets were hit by both country-specific problems and the realization that the Fed's trimmed bond-buying program reduces the liquidity that has boosted higher-yielding emerging market assets and put a floor under U.S. stock prices.

The Fed's plan to gradually withdraw its stimulus has long been expected to lead to a pullout from emerging markets. But the prospect of an economic slowdown in China added to concerns on Friday that emerging markets, particularly those with large current account deficits, may struggle to support their currencies this year.

The Fed's policy-setting committee meets on Tuesday and Wednesday. Another cut to the monthly purchase of Treasuries and mortgage-backed securities - to $65 billion from the current $75 billion - is all but certain, based on policymakers' recent comments.

"Is the Fed going to zigzag with the taper, based on what we already knew, that emerging markets were vulnerable to liquidity being taken out of the system in the U.S.?" said Quincy Krosby, market strategist at Prudential Financial in Newark.

"It's a moral hazard," she said, adding that regardless of when the Fed withdraws further, the expected market reaction will be roughly the same.

The broad selloff in emerging markets over the past two sessions translated into the worst week for global stocks in seven months. The S&P 500 slid 2.6 percent, its largest weekly decline since June 2012.

It would be hard, however, for the Fed to skip a taper, citing a pullback in the stock market, when the S&P 500 is just 3.1 percent below its record closing high, set last week.

SOME SEE 'BUY' SIGNS

Economic data next week, including new home sales and consumer confidence, is expected to continue to paint a picture of recovery in the U.S. economy, which could help bring buyers back into U.S. equities.

"There are good domestic reasons to expect the U.S. economy to be doing well over the year to come, and our central expectation is that while U.S. markets could take a temporary hit (due to the selloff in emerging markets), the shock will not be a major

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