Economists have reached the conclusion that it is a 50-50 bet as to whether the US Federal Reserve will begin tapering its $85 billion a month bond-buying program when it meets on Tuesday and Wednesday for its final policy meeting of 2013.
The stimulus program has underpinned global equity markets over the last five years and has been one of the drivers of the Australian S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and the US Dow Jones Industrial Average.
However, Philip Baker posed the question in The Australian Financial Review: 'Just how long can the markets be held hostage to the Fed?'
After all, the 'massive ultra-loose monetary policy' has undermined the importance of companies' earnings growth with investors simply recognising easy gains to be made.
Now, strong economic data that has emerged from the U.S. has led economists to believe that the Fed has sufficient evidence to reduce its stimulus without jeopardising the market's stability or jobs growth. Should that be the case, Colonial First State Global Asset Management's head of economic and market research, Stephen Halmarick, believes that it could be as much as a US$10 to $15 billion per month reduction.
Whilst that would not be an enormous reduction and would unlikely have a drastic effect on the market, it would certainly deliver the message that the world's largest economy is recovering and that further tapering could be announced at any time.
In anticipation of the result, Australia's benchmark index has plunged 4.4% this month alone. Although some analysts believe that the pending taper has already been priced into the market, we could certainly experience further mood swings should the Fed decide that it is indeed time to reduce stimulus.
Tapering is a good thing
The important thing for investors to note however, is that the tapering is a good thing. It reflects a recovering market that no longer requires as much support as it has been given in recent years, and one that can be driven once again by earnings and company growth.
Whilst global equity markets might experience turbulence in the coming weeks (should tapering be announced), investors should consider it as a good sign for the future.
Nonetheless, to protect your portfolio from these possible mood swings, investors should ensure that their portfolio maintains a strong foundation, made up of large, well-established companies such as Telstra (ASX: TLS), Woolworths (ASX: WOW), Wesfarmers (ASX: WES) or CSL (ASX: CSL).
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