The Federal Reserve Open Market Committee or FOMC came down from its financial Mt. Olympus on Wednesday to deliver a decision on monetary policy.The headline decision was to decrease its monthly purchases of bonds by $10 billion to $75 billion.
That is what was referred to as tapering. The immediate Pavlovian reaction was to sell stocks. That however was a major mistake because the FOMC had a second message to the market. That message was that short term rates were going to be maintained at a range of 0 – ¼% for the foreseeable future. The second part of the FOMC statement was met with intensive buying, first reversing the aforementioned selling and then rallying to all-time highs for the Dow Jones Industrials (DJIA) and S&P 500 (SPX).
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The bears were poorly positioned, as they have been all year. The recent mild pullback gave them hope that a major correction was taking place and all they needed to make that happen was FOMC tapering. Hope is not an investment strategy.
The smart money saw tapering as a reaction to improving economic conditions. The multiplier effect of better economic growth will offset the negative impact, if there is any at all, from tapering. The mistake on the part of the bears was that they put too much emphasis on Quantitative Easing or QE. While that might have been a contributing factor, it was a small one. Too often, the bears think in a binary way. Yesterday, they were scrambling to cover their shorts as their year went from the frying pan and into the fire.
I would note that the impact of yesterday’s FOMC announcement was a rush to buy dividend oriented stocks which have been forsaken ever since the tapering rumors began to circulate. Now that tapering mania is over, expect those stocks to begin to perform better, which should help the High Dividend Low Volatility portfolio that LakeView Asset Management runs on Covestor.
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