Dreaded taper begins, stocks up, explanations aplenty

[Lsbcal]

Did you guess right on how the taper would affect equities? What about bonds?

Anyway, I love all that green in the stock market.

 

[pb4uski]

Long run I'm a bullish on equities. Tapering means to me that the economy is improving enough to no longer need life support and an improving economy is good for stocks. Increasing interest rates is bad for bonds.

By sheer coincidence, I am almost out of domestic investment grade bonds as of today (still hold some international bonds and domestic high yield bonds) so I may not be so quick to get back into bonds, but I'm keen to hear what others think.

 

[GrayHare]

I think the green is due to both a slow taper, and pronouncement that easy money will continue longer.

 

[Bestwifeever]

Financial pundit A: Mr Market obviously factored the taper in already.

Financial pundit B: Mr Market is just now reacting to the taper and will be factoring it in.

Either way, perhaps there is a little whee being whispered around here.

 

[sanfanciscotreat]

I would rather see slow moderate growth than explosive growth followed by a catastrophic downturn.

 

[veremchuka]

I think the budget deal took some fears off the table also.

 

[NW-Bound]

It's always easy to explain after the facts.

Here's my take. The Fed is only going to taper QE from $85B/month to $75B/month, less cut than some expected. And then, they threw in some comforting words that unemployment was still higher than they wanted to see. Also recently, more economists are predicting that worldwide inflation will be subdued, and commodity prices will even drop due to more supplies being brought online.

Party on...

 

[marko]

I was expecting a 200 point DROP the minute I heard the "T" word...only the 9th time I was wrong today!

 

[ERhoosier]

After listening pretty carefully to the better financial pundits, I was puzzled by markets' reactions- both big pop in equities & 'meh' in bonds.

 

[galeno]

We're going to cut back to 55-60% stocks in 2014. The proceeds will either be placed into a 5 yr CD or an intermediate term bond fund whichever is yielding more at the moment.

 

[kgtest]

I was expecting a 200 point DROP the minute I heard the "T" word...only the 9th time I was wrong today!

Haha. You must be watching on the daily like me. I started tracking my portfolio balance daily...adding little comments each day so I can go back in time to reflect 30years from now when I am finally old and retired like y'all.

Anywho, the notes I put in are to explain the + or the - for the day based on the days actions etc.

Yesterday's note was "All three major stock indexes fell for the week despite strong reports on jobs, housing, and retail spending. "

and Today's note was: "Risk appetite withstands Fed shift, dollar/euro surges. Stocks gain on Fed decision to taper"​

 

[foxfirev5]

I'm glad I don't get paid to figure this stuff out. Right or wrong I'm going to continue plodding along with my boring ISP and AA.

 

[Midpack]

Not quite sure how they can do both, but they say the plan to taper and hold interest rates low as long or longer than their own previous estimates. On CBS this morning they said plan on 2015. I am OK with bond funds still, though not adding $. YMMV

And like the other post above, I assume having the budget deal clear it's last hurdle, passage in the Senate, avoiding another budget battle until 2015 has eased some economic anxiety. Hopefully cooler heads will prevail with the debt ceiling too.

Federal Reserve officials Wednesday described their pullback on a key stimulus program as modest, and at the same time sought to allay any concerns about the central bank's efforts to boost growth by promising to keep short-term interest rates low longer that it has signaled before.

But at the same time as it began tapering its bond purchases, the Fed assured financial markets it would keep its short-term interest rate at near zero, where it has been since December 2008, until "well past the time" that the unemployment rate drops below 6.5%.

The Fed in the past has said it would hold rates low as long as the unemployment rate was above 6.5%.

By the Fed's most recent projections, the unemployment rate would drop to no lower than 6.3% by the end of 2014, and might not be well below the target level until 2015.

 

[donheff]

I was expecting a 200 point DROP the minute I heard the "T" word...only the 9th time I was wrong today!

+1. When I saw the markets were up shortly after 2:00 PM I assumed the Fed had announced they were waiting. When I saw what really happened I reacted like NW-Bound, assuming the modest glide path they announced was reassuring and overcame the past few days pessimism about what might happen. The amusing fact is that if I had access to insider info on what the announcement was going to be I would have been tempted to sell equities the day before planning to buy yesterday afternoon after the 200 point drop. I will never time, I will never time, I will...

 

[rbmrtn]

The FED has two criteria they are watching, unemployment and inflation. Unemployment has come down some but inflation is still below their target. They only adjusted their bond buying by about 10%, nothing really dramatic. They essentially said rates may remain low for an extended period of time, which is nothing really different than what they have been saying. Market overreacts as usually, probably will retract some today.

FED meeting text, Text of the Fed

I think this excerpt captures most of their guidance

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal

 

[kgtest]

Here is the fed's press release.

FRB: Press Release--Federal Reserve issues FOMC statement--December 18, 2013

 

[NW-Bound]

If you look at emerging markets, via an ETF like Vanguard's VWO for example, you will see that they have been down bad this year, particulary the drop in May 2013 when the word was out that the Fed would be tightening. I think that's the reason they chose a more soothing message to ease the world's concern. Perception is reality. Well, in the short term anyway.

 

[Lsbcal]

A little bit OT but there was an interesting discussion of EM market bonds here: Are Emerging Markets Now a Danger?

There is a link within that M* article to another at FT Times. From that linked article:

The purchasers of these bonds search for yield in a low-yield world by lending longer and riskier. Borrowers take advantage of the lower cost of foreign-currency bonds. But in the process, they assume a currency mismatch: foreign currency debt against domestic currency assets. These borrowers are speculating on their domestic currencies. Students of the Asian financial crisis of 1997-98 will find this disturbingly familiar. Non-financial companies have taken on a “carry trade”, by financing local assets with apparently cheap dollars.

When funding conditions turn, such trades can become lethal. As the Fed is expected to tighten, the dollar will rise, prices of dollar bonds will fall and dollar funding will reverse.

So I guess it's something like US rates up, dollar up, US bonds catch a cold, EM bonds die, ... etc. Maybe a good reason to go for safety first in bonds, not just yield.

 

[RAE]

Anyway, I love all that green in the stock market.

I wouldn't get used to it. In my opinion, 2014 is not going to be a good year for equities. Yeah, I know, it's impossible to time the market, but I just think this market has been propped up for way too long by the Fed's manipulation. Something has to give eventually, and when it does, the correction could be pretty sudden and drastic. Personally, I have cut way back on my exposure to equities for a while. If I'm wrong, that's okay; I'd rather sleep well at night and earn 3% on my PenFed CDs, at least for now.

 

[Lsbcal]

Good luck with those CD's. I hope you are wrong on equities in 2014. I'm rooting for up and to the right but it does not matter what I think, that's up to the masses.

 

[Spanky]

I wouldn't get used to it. In my opinion, 2014 is not going to be a good year for equities. Yeah, I know, it's impossible to time the market, but I just think this market has been propped up for way too long by the Fed's manipulation. Something has to give eventually, and when it does, the correction could be pretty sudden and drastic. Personally, I have cut way back on my exposure to equities for a while. If I'm wrong, that's okay; I'd rather sleep well at night and earn 3% on my PenFed CDs, at least for now.

What's your allocation to equity now?

 

[audreyh1]

Bonds were more or less flat yesterday, but they took a bit of a beating today. Especially the 5 year Treasury which moved up to 1.64% today from 1.51% yesterday - that's a pretty good jump. 10 year - it crossed that 2.9% line it had stayed under since last September. A delayed reaction.

Stocks - I think they are reacting to reduced uncertainty (taper and budget) plus the Fed is clearly seeing an improving economy PLUS inflation remaining low for at least the next year. Stocks like both things.

Bonds - they are anticipating more supply I think (so prices drop, yields rise). I don't think the 10-year can go that much higher given the low inflation. The shorter term bonds? - I suspect they could move quite a bit higher - in other words have the yield curve flatten a bit.

 

[Lsbcal]

I'm guessing the short bonds (2yr duration) will not go up for a few years. I'd imagine it all depends on whether there appear to be distortions (inflation, excess speculation) developing in the economy.

Right now the spread in 5yr and Tbills is 1.5%. Pretty high and supposedly above 1% it has paid to move out on the yield curve. At least according to Swedroe and DFA.

 

[haha]

I'm guessing the short bonds (2yr duration) will not go up for a few years. I'd imagine it all depends on whether there appear to be distortions (inflation, excess speculation) developing in the economy.

Right now the spread in 5yr and Tbills is 1.5%. Pretty high and supposedly above 1% it has paid to move out on the yield curve. At least according to Swedroe and DFA.

Do you have a link so I could read about this?

Ha

 

[Lsbcal]

Do you have a link so I could read about this?

Ha

Maybe check out the Bogleheads site with "shifting maturity" as a start to a search. Swedroe covers this in his bond book The Only Guide to a Winning Bond Strategy You'll Ever Need (stupid title but he says he didn't choose it) on page 76-77 :

...DFA imposes an arbitrary rule that a longer maturity must provide at least twenty basis points per annum in higher expected returns in order for DFA to extend maturity.