Musings on a Tricky Market

Let’s stipulate: The stock and bond markets are always tricky. They are always challenging. They are always marked by uncertainty.

In fact, investing in the face of uncertainty is how people make and lose money: You think the “uncertainties” about company XYZ, or about the macro environment, make that company’s stock a buy; I analyze those same uncertainties and decide it’s a sell. Uncertainty, I’d argue, is the essence of a market.

But these days, the trickiness is heightened. The playbook that has worked for the past four-plus years is being rewritten. Or at least that’s the threat or the fear. The Federal Reserve last week didn’t just signal its intention to pull back on monetary stimulus, it put semi-firm dates on when it will begin doing so.

(Read More: Bernanke Hints Tapering Nearing, Markets React)

That changed the spin on the ball. So did news from China that it’s going to begin tightening credit. Shanghai stocks lost 5 percent Monday and another 5 percent overnight before rebounding. That market is now in bear market territory, off 20 percent from its recent peak.

Despite Tuesday’s rally, U.S. stocks have pulled back roughly 5 percent in a month. Treasury yields have spiked by a full percentage point from their lows about eight weeks ago.

This is all because the central tenet of the old playbook—the Fed buys bonds, forcing interest rates down and stock prices up—is being rewritten.

And that matters to you.

I don’t pretend to know what’s next for stocks. But what I do believe is that a re-pricing is taking place, not just in the U.S. but globally, in response to the presumption that tighter money is on the way. Stock prices will probably overreact; in fact, they may already have.

(Read More: How to Play Fed Tapering: Investment Pro)

The other thing I feel confident in saying is that, as monetary stimulus wanes, investors must now pay closer attention to economic and corporate fundamentals. How fast is the economy growing? (Tuesday’s housing news is encouraging; so were the consumer confidence numbers.) How are corporate profits stacking up? We will begin to get the second-quarter numbers week after next. More important, what are companies saying about their prospects for the remainder of the year? Will earnings grow? Or plateau?

As the Fed presumably gets ready to slow its pace of bond buying, that corporate commentary is going to count even more than it has over the past few years. So, as earnings season gets under way in early July, pay close attention to what the companies you own did in 2013’s second quarter. Pay even closer attention to what they say.

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