It might surprise even the most “plugged-in” investor to learn that the S&P 500 has gained roughly 20% through three quarters of 2013. Plenty of worries could have quashed this rally at various times throughout the year, but stocks have remained extremely resilient.

Bonds, on the other hand, have lost money in 2013, most significantly since June when Fed Chairman Ben Bernanke made comments that seemed to accelerate the Fed’s timetable for “tapering” – as early as Q4 this year, versus prior best guesses of mid 2014 at the earliest.  (Tapering simply refers to a process by which the Fed scales back its aggressive monthly bond buying campaign, known as quantitative easing or QE.)

Bernanke’s comments did not signal a change in his stance on monetary policy, nor did they contradict the Fed’s transparent commitment to making decisions based on the economic data, as it should. The speech simply shed new light on a process everyone knew would come one day – after all, the Fed has to end QE at some point. Stocks and bonds initially reacted negatively to the comments. However, as it became clear that the Fed was unlikely to taper in 2013 – an assessment that was validated by the Fed’s “no change” decision in September – stocks and bonds rebounded.

With or without QE, corporate profits and cash flows are supporting stocks’ gains 55 months into the current bull market.  We have long argued that “QE infinity” is not a credible driver of higher stock prices. Rather, many stocks have solid fundamental support at these levels and could stand on their own without continuing this level of extraordinary monetary accommodation. It is not so much that ongoing QE is harmful – we just think it is unnecessary interference at this stage in the cycle. We want the taper to start sooner because the economy is expanding and interest rates should be allowed to find a natural equilibrium at presumably higher levels. Markets might drop initial when the tapering begins, but if June-August is any indication, the longer-term adjustment will be orderly and efficient.

While investors parsed Bernanke’s comments to identify the start date for tapering, it also became clear that he won’t be the one pumping the brakes when it does begin. This created additional uncertainty for QE junkies because it was unclear whether his successor would lean towards his dovish stance or assume a more hawkish position.  It turns out that Janet Yellen, long-time Fed governor, will replace Bernanke. She is the safe choice (for President Obama and for markets) because her views are very similar to outgoing chairman Bernanke’s. Absent significant improvement in the economic data, Yellen’s appointment likely means more QE for longer.  Oh, well.

And just when everything was sorted out at the Fed, a rancorous debate has re-emerged over the Treasury function.  We tried to forget the ugliness and volatility that surrounded the 2011 debt ceiling debate, but it appears we will be forced to re-live it to some extent this fall. We still believe that, despite astounding and worsening political obstinacy, Congress will congeal to avoid the country’s first ever default.