How Will the Fed Tapering of Asset Purchases Impact the Market?
Yesterday, the Fed finally decided to start the tapering of its asset purchases. It was pretty anticlimactic as the Fed has been hinting at this for many months. Further, the...
Yesterday, the Fed finally decided to start the tapering of its asset purchases. It was pretty anticlimactic as the Fed has been hinting at this for many months. Further, the economy is in a much better place than it was when these policies were initiated. Just look at the S&P 500 (SPY) at all-time highs, real estate prices at new highs in many places, consumption at new highs, and business investment at new, post-pandemic levels. In today’s commentary, I want to discuss the Fed’s decision and what this tells us about the current cycle. Read on below to find out more….
(Please enjoy this updated version of my weekly commentary published November 04, 2021 from the POWR Stocks Under $10 newsletter).
Over the last week, the market’s advance has continued with the S&P 500 up by nearly 2%. Even more impressive is the Russell 2000’s more than 4% gain.
This small-cap outperformance is not too surprising given that Congress seems to be getting closer to an agreement on a final infrastructure and reconciliation package that should come in around $3 trillion.
What was more surprising was the bullish reaction on Wall Street when the FOMC announced that it would begin tapering asset purchases. Currently, the Fed is buying $150 billion of securities every month – a mix of Treasuries and mortgage-backed securities (MBS).
Starting later this month, the Fed will be reducing these asset purchases by $15 billion. In essence, this is the “beginning of the end” of the extraordinary support that the Fed has provided the economy.
In a vacuum, this is marginally bearish for the market. Simply put, it means that short-term rates will be rising, and we are getting closer to the first rate hike. From June till now, we have seen the 2-Year Treasury yield rise from 0.15% to 0.45%.
However, the Federal Reserve is only making this move, because it’s confident that the economy has enough momentum to handle slightly higher rates. It will also have the benefit of tamping down on inflationary pressures.
Overall, I believe that “inflation concerns” may have peaked in Q3. This fits with the Fed starting its taper in addition to other signs that bottlenecks and supply chain issues in the economy are easing.
In a bigger picture sense, the Fed starting its taper, officially marks the end of the first phase of this bull market. This is the ‘easy money’ phase when good news is good because it means companies will earn more money but also bad news is good, because it means the Fed will provide more support or the same support for longer, boosting asset prices.
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Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares were trading at $470.14 per share on Friday morning, up $3.23 (+0.69%). Year-to-date, SPY has gained 26.98%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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