With today’s announcement by the Federal Reserve to reduce the amount of monthly bond purchases by $10B to $75B, the Dow Jones Industrial Average reacted overwhelmingly positively by jumping from near zero change to finishing up 292.71 points on the day. This launched the index to 16,197.97, and back above its all-time high reached earlier this month.
This comes after a 198.69 point gain on the Dow following the release of November jobs data on December 6, and a report pegging unemployment at 7%, the lowest level in five years. (Granted, there is a very important issue of declining labor force participation helping the unemployment rate. However, the raw number “looks good,” and it tends to be the raw number to which traders react.)
These positive reactions in the stock market to positive economic news and the reduction of Fed bond purchases stands in stark contrast to market reactions in the second quarter of this year. Some may recall that the market was on a tear until about mid-May, when the Fed began to make noises about potentially “tapering,” or reducing the monthly bond purchases it has been making since September 2012. Reactions to the idea of Fed tapering involved worry and angst that the economy would fall back into recession without this life support. Because the Fed was looking for positive economic data before reducing bond purchases, when positive economic data was released the market would react negatively. Good news was bad news.
While we hardly consider ourselves to be prescient, we stick by the words written in our summer newsletter: “Because we are investors, rather than traders, we believe good news is good news. The economy, while still fragile, is showing consistent signs of being able to sustain itself. We would much rather see an economy of this nature than one unable to be sustained without the unprecedented Fed intervention we have seen for the last several years. We believe the Fed will be cautious in its unwinding of accommodative monetary policies and be sensitive to new economic data as it comes available.”
There comes a time when life support can do more harm than good. The patient’s heart is now beating on its own, and no longer needs chest compressions. Make no mistake; there remains an enormous amount of accommodative monetary policy in place. However, by beginning to slowly remove some of the bond purchasing, the Fed is voicing confidence that the economy is on the right track. In contrast to some, we look forward to continued measured steps by the Fed in 2014 to further remove the life support as the economy shows signs of sustaining itself. May good news be good news!
– Barry Nelson