In taper move, Fed inspires confidence in stock and bond investors

Modest $10 billion cut plus reaffirmation of zero-interest rate policy puts nervous investors at ease

Dec 18, 2013 @ 3:35 pm

By Jeff Benjamin

The Federal Reserve, in delicately announcing the start of its tapering program, has masterfully inspired confidence in both the stock and bond markets.

After frustrating the market with a head-fake no-taper announcement in September, the Fed on Wednesday laid out plans for a $10 billion reduction of its $85 billion monthly bond buying program that has pushed the Fed's balance sheet to beyond $4 trillion.

The equity markets, which had been fretting the notion of tapering as a death knell to the five-year market rally, jumped on the wording of the announcement as positive.

After dipping initially on the 2 p.m. Eastern time report, stock prices spiked in a display of confidence related to the Fed's reminder that it has no plans to raise interest rates anytime soon.

“The two things that the market liked about the Fed announcement are that the reduction in bond purchases is pretty modest, and the Fed reaffirmed it zero-interest-rate policy,” said Dan Veru, chief investment officer at Palisade Capital Management.

“I would have been surprised if they just said they were tapering and then said nothing else, but this kind of announcement didn't really surprise me,” he added. “They went out of their way to emphasize that the Fed will remain extremely accommodative.”

While some market watchers essentially took tapering off the table until after Fed Chairman Ben Bernanke is replaced on Feb. 1 by Vice Chairman Janet Yellen, the taper decision is now being interpreted as a clear sign that the economy is strong enough to start standing on its own.

Even though any reduction in the five-plus-year quantitative easing should be seen as a sign of economic strength, investors of all stripes were concerned that the market would panic as soon as the Fed pulled back on a program that was widely seen as helping to fuel the stock market's bull run that has the S&P 500 index up 25% for the year.

“From a real economic perspective, this is a positive step,” said Brad McMillan, chief investor officer of Commonwealth Financial Network.

“I expected more of a negative reaction from the market, and I do question whether this is a sell-the-rumor-buy-the-news move,” he added. “But I think over the next few weeks we'll see the market push to new highs.”

Burt White, chief investment officer at LPL Financial Services, said if the market was surprised by the announcement, it was a pleasant surprise, particularly for Treasury bonds, which seemed to hold steady while stocks rallied.

“A lot of people got sort of confused about the difference between tapering and tightening, but now it seems people are starting to understand the viewpoint that even with tapering we'll have rates lower for longer,” he said. “We might actually see an environment where stocks go higher and bonds hang in there in a kind of goldilocks rally.”

Mr. White said the Fed “figured out a way to taper without being bearish” through some key wording that might have actually raised the Fed’s threshold for eventually raising interest rates.

“The Fed changed its trigger for raising rates from an unemployment rate of 6.5% to at least 6.5%,” he said.

The subtlety of the language is no small point, according to Mr. White, who believes the Fed deliberately introduced some new leeway in the monetary policy.

“What surprised me is how bullishly confident the Fed was in its statement,” he said. “The market has been focused on whether the Fed was hawkish or dovish, but it should have been focusing on whether they were bullish.”

The Dow Jones Industrial Average gained nearly 300 points after the Fed’s afternoon announcement. The 10-year Treasury yield gained four basis points to reach 2.88%, showing that the bond market remained relatively calm.

“Clearly, the market liked this announcement, and I think it also helps the Fed get some credibility back,” said Doug Coté, chief investment strategist at ING U.S. Investment Management.

“I think this is all part of getting us back to normal,” he added. “This clearly passes the mantle for the growth of the economy back to the market and back to fundamentals, which are truly in control now and they will have to sustain themselves.”


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Crossmark's Rentfrow: Why should advisors care about responsible investing?

There are lot of misconceptions when it comes to socially responsible investing. Crossmark's David Rentfrow debunks the myths and discusses opportunities for advisers.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print