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Worst case for Fed taper: mere market 'indigestion'?

Wednesday, 14 Aug 2013 | 11:47 PM ET
Tapering will be a 'non-event'
Michael Crofton, President & CEO at the Philadelphia Trust Company, says investors should relax about the impacts of tapering as there will likely be little reaction. He also talks about why he is extremely bullish on U.S. stocks.

Markets are expected to take the much-anticipated wind down of the Federal Reserve's massive monetary stimulus in their stride, one analyst told CNBC on Thursday, even if the move is more aggressive than predicted.

Global financial markets have suffered wild swings since the U.S. central bank first said in late May it was considering slowing its $85 billion per month bond buying program.

But Mike Crofton, president and CEO of U.S. based investment firm Philadelphia Trust, told CNBC that if and when the Fed finally makes its move, it will not trigger the sharp correction that many have feared.

(Read more: Here's what is benefiting from Fed tapering fears)

"I think it's going to be a non-event. A minor taper is already priced in...the market's not going to miss a beat," said Crofton.

And even if the tapering is more robust than the $20 billion reduction in bond purchases per month most analysts are forecasting, Crofton doesn't expect a major reaction either.

(Read more: A 'dove-nado' of Fed speak could be more powerful than QE)

"If they taper more than expected, then the market may have a little indigestion...if anything it will be short lived... I don't think we are going to see any kind of correction," he added.

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An improving U.S. economy has sparked a big rally in U.S. stocks this year, driving the Dow and S&P 500 indices to record highs, and many investors now fear the tapering could dampen the upward trajectory.

But Crofton said the U.S. stock market has enough "forward momentum" to withstand a scale back of stimulus, which is widely expected to begin in September.

(Read more: Fed uncertainty hurting stock market tone)

"There are some great statistics underpinning this market and nothing is going to stop it," said Crofton, referring to better housing, jobs and gross domestic product data to emerge from the economy in recent times.

"If employment improves and unemployment could start mitigating a bit... then the market could really start to see some new levels," he said. The U.S. jobless rate, at 7.4 percent in July, is at the lowest level in four years.

Another driver for the market will be once the much speculated 'great rotation' out of bonds and into equities, starts to gain traction, Crofton added.

(Read more: Fed outlier! No taper before year-end: Strategist)

"Everybody has talked about the great rotation out of bonds and into stocks, that hasn't really started to happen, so if that does then we could see the markets going to new highs," he said.

The S&P 500 has gained around 18 percent this year, although thin volumes in August have caused the index to pull back roughly 1.3 percent from a record high of 1,709 hit on August 2. The Dow, which has risen 17 percent this year, also scaled new heights in August.

In recent weeks, a number of Fed officials including St. Louis's James Bullard and Atlanta's Dennis Lockhart have voiced concerns about the impacts of the Fed tapering too soon, further fueling the ongoing debate about the timing of the move which has dominated the investment community for months.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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