The Fed surprised the market today by announcing a small reduction in its monthly QE purchases, but rather than falling apart like some expected, the market rocketed to new all-time highs. The initial reaction was to the downside, but stocks quickly reversed and then accelerated to the upside. The Dow led the charge with a 1.8% gain, the S&P finished up 1.6% and the Nasdaq gained 1.1%.
Ever since QE tapering entered the market lexicon early this Summer, the media has hyped it as the potential downfall of the bull market. However, today the market supported our notion that, frankly, it’s really not that big of a deal. Interest rates will likely remain at zero for at least the next two years, and $75 million per month is nothing to sneeze at. Meanwhile, the job market recovery is showing signs of acceleration.
The Fed has been using 6.5% unemployment as the benchmark that would trigger a rate hike, but in today’s statement said it would not necessarily raise rates if we hit that 6.5% number. The FOMC also issued more optimistic projections for the US economy in 2014. They now expect to see unemployment at 6.3-6.6% in 2014 and raised expectations for GDP growth. With dove Janet Yellen now set to step into the Fed chairman role, it doesn’t seem like the Fed will be in any hurry to fully unwind QE until the economic recovery really picks up steam.
The banks were among the strongest sectors after the announcement, with the Financial Sector ETF (XLF) finishing up 2.32%. Bank of America (BAC), my bank pick in my 2013 thesis, showed relative strength with a 3.49% gain to break out of its multi-week descending channel, while Goldman Sachs (GS) broke out to new highs with a 2.58% gain.
Today’s action was a very positive step for the market, and will breed confidence going into the 2014. Given all of the hype, I think some investors were worried about how stocks would react to the first QE taper, and now with that anxiety out of the way and economy improving, I think the stage is set for a healthier rally where “good news” is once again “good news.”
Disclosure: Scott Redler is long BAC, GS, GE, FXI, IBB.