Federal Reserve Chairman Ben Bernanke did something that many on Wall Street including myself did not believe he had the inclination to do: he began the tapering process in his final meeting as the head of the most powerful central bank in the world.
The Federal Reserve will cut its bond buying by $10.0 billion each month, which I believe is a sensible move at this point, given the economic renewal and jobs market growth.
Markets surged to new record-highs for the S&P 500 and Dow Jones Industrial Average, as now there’s a sense that the ongoing uncertainty of when the Federal Reserve will begin to taper has finally been removed, and traders like certainty.
In addition, by reducing the stimulus by just less than 12%, the Federal Reserve can also gauge the market reaction and any negative impact tapering may have on the economy.
The intense buying following the announcement was based on the premise that the economy was moving along pretty well, and this could fuel consumer spending and gross domestic product (GDP) growth. The market was also pleased to hear that the record-low near-zero interest rates could remain, even if the unemployment rate fell below 6.5%.
With Christmas in a few days, it was nice that Bernanke graciously began to rein in the easy money flow. Now a plan has been put into place and the incoming Federal Reserve Chair Janet Yellen will continue it based on how the economy and jobs market progress.
In the meantime, the news also means potentially more stock market gains for investors—albeit, at a slower pace than this past year.
Bernanke showered the stock market with presents over his term. First, it was QE1, followed by QE2, and then the third installment through QE3. It has been a wonderful upward ride in 2013.
Imagine if I had told you back in January that the NASDAQ and S&P 500 would rise by more than 30% this year… The majority of you would have thought I was on something, and really, we were: the Federal Reserve pumped so much money into the economy this year that the market developed a dependence on the cheap money as if it were cocaine.
As we move into the New Year, the Federal Reserve must continue to wean the markets off the easy money as the situation warrants.
If job creation continues to come in at around 200,000 or more and the unemployment rate falls to below seven percent by February, then I would expect the Federal Reserve to continue to slash its buying in the bond market.
There will also clearly be more certainty in Washington as a proposed budget deal appears to be in the works, which should avoid another government shutdown.
The tapering by the Federal Reserve will allow the stock market to trade in a more “normal” fashion, with the focus on the economy and corporate America.
There will still be money to be made, but it will be more difficult. Some of you may want to play the certainty of index exchange-traded funds (ETFs). With only a few days remaining in the year, you might also want to take some profits off the table and cut some losing positions prior to the year’s end.
Read which stocks I believe could be hot picks in 2014 in “My Early Insights on the Big Stock Market Winners in 2014.”