The coming week should be relatively quiet on the financial news front. But, given that the media never rests, there’ll be plenty to pique your interest. This week’s stories and interviews will be all about the what ifs: What if the Fed tapers in September? What if the children in Washington don’t play nice as they bump their heads against the debt ceiling? What happens to stocks if when bond yields begin to rise?

While there’s lots more we could cover (we can go Japan, China and Europe all day long), to keep it brief—and pertinent to what I suspect you’ll be hearing (mostly) during the week—I’ll address just the above three:

What if the Fed tapers back on its bond purchases (quantitative easing) this September? A few weeks ago I thought there was a pretty strong chance that they’d begin backing off in the fall. Now I’m not so sure. More recent Fed commentary (its timing and content) suggests that they are, in my view, way too concerned with the price of the average share of stock. And while there’s little evidence (save for all the counterfactuals) that QE is measurably improving the economy, it doesn’t appear—with stocks trading at 14 times next year’s earnings (not historically expensive) and housing still far from its price peak—that they feel the need (or possess the political will) to upset the financial markets at the moment. But the “what if” question was what if they do cut QE this September. I’d guess that traders would greet it coldly with a bigger than average—across the board—selloff in both bonds and stocks. If however, in the aftermath, the economy appears to be gaining a little traction, I’d guess stocks would recover relatively quickly (barring some other exogenous shock stemming from a few zillion possibilities) leaving bonds in the dust. OPERATIVE WORDS BEING “I’D GUESS”. THIS IS NO PREDICTION AND IN NO WAY ACTIONABLE AS IT RELATES TO YOUR LONG-TERM PORTFOLIO!

What if the politicians don’t play nice in the sandbox? The fact that congress’s low approval rating makes the President, with his low approval rating, look like a rockstar (meaning all the children are in timeout), come debt ceiling time they’ll join forces—the usual brinkmanship notwithstanding—and play their favorite game, kick the can…

What happens to stocks when bond yields rise? Of course that depends on the reason(s) for the rise. And, as you may know, I DON’T MAKE SHORT-TERM PREDICTIONS! 🙂

P.s. If the coming week blesses us with some downward volatility (we could use it btw), I’ll be a bit slow in the usual followup commentary. I’ll be away from the office all week, but won’t be entirely disconnected.

Have a great week!