Stocks ended last week on a strong note, thanks to a better-than-expected report on November payroll growth. But the Dow Jones industrial average and the S&P 500 both ended flat for the week, snapping a run of eight up weeks in a row. The Nasdaq managed to close higher for a fourth straight week.
The Fed has been the main focus for investors since May, when chairman Ben Bernanke first hinted that the central bank could begin to "taper" its $85 billion per month bond-buying program.
The bond purchases, part of a strategy called quantitative easing, have helped a fuel a bull market in stocks since March 2009. But as the economy improves, the Fed has been preparing the market for the day when those purchases will get a bit smaller.
As a result, many investors see good economic news as a bad sign for stocks, since it suggests the Fed will taper soon. But others argue that good economic news is a positive for the market because a stronger economy should translate to better corporate earnings growth.
The bond market seems to be more prepared for tapering. The yield on the 10-year Treasury note rose jumped as high as 2.93% on Friday -- near their highest levels of the year. While long-term rates are still historically low, the fact that rates are rising is a sign investors expect a Fed pullback on bond purchases soon. Bond yields rise when prices fall, so bond investors are getting ahead of the Fed and selling now.
The Fed will conclude its final policy meeting of the year on Dec. 18. But most investors doubt that current Fed chairman Ben Bernanke will push for a major change in policy before his term ends in January.
The general consensus is that tapering will begin sometime next year after incoming chairman Janet Yellen takes over. Yellen is still waiting official confirmation by the Senate but there is little chance that she will not be approved given that Democrats have a majority in the Senate.
Keith Springer, president of Springer Financial Advisors in Sacramento, doesn't expect the Fed to taper anytime soon. "The economy may be improving but there is no way it can stand on its own," he said.
In the meantime, Springer says investors should follow the old Wall Street adage: "Don't fight the Fed."
Springer said stocks could also benefit in the short run from seasonal factors, including the so-called Santa Claus Rally. Over the past 30 years, the S&P 500 has gone up in December 80% of the time, according to data from Schaeffer's Investment Research.
But given how much stocks have already gained, there's no guarantee the trend will hold this year. The Dow is up more than 22% so far in 2013 while the S&P 500 has gained more than 26%. Both have hit a series of all-time highs, and some strategists say stocks are overdue for a pullback.
On the corporate front, there are few companies reporting quarterly results this week. The highlights are gun maker Smith & Wesson (, )Costco (Fortune 500), software company , Adobe ( and yoga apparel retailer )lululemon (. )
But the market for initial public offerings is still going strong.
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