Dow rallies to a new high
NEW YORK — The long-feared tapering of economic stimulus by the Federal Reserve powered the stock market to its latest record high as investors rejoiced at the prospect of stronger growth next year.
The Dow Jones industrial average catapulted nearly 300 points in the third-largest point gain for the blue-chip index this year. The broader Standard & Poor’s 500 index also closed at a record high.
Investors were in a buying mood after the Fed announced a modest $10-billion-a-month reduction in its bond-buying program. The easing of the Fed’s stimulus is known more commonly among traders and market analysts as a “taper.”
The Fed also assuaged any anxiety in the market by pledging to not give up on its easy-money policies any time soon as a way to continue propping up the economy.
Wall Street also rallied around the Fed’s announcement because it put to rest when policymakers would make such a move. Stock market watchers have been fretting about a taper for much of the year, especially as the stock market hit stratospheric levels.
“The market sees it as the right thing to do,” said J.J. Kinahan, chief strategist at TD Ameritrade. “It views it as a vote of confidence that the [economy] is as healthy as the numbers have been portraying it.”
Instead of yanking stocks lower, the stock market’s obsession on how long the Fed would continue its stimulus program resulted in a big rally. The Dow is now up 23% for 2013, the S&P 500 has rocketed 27% higher, and the tech-heavy Nasdaq composite has surged nearly 35%.
Investors shoveled $325 billion into stocks Wednesday, as measured by the Wilshire 5000 Total Market Index, considered the broadest gauge of U.S. equities. The index has swelled by $4.9 trillion in value this year.
By buying $85 billion in bonds every month, the Fed has tried to lower borrowing costs for consumers and businesses as a way to stimulate economic growth.
With interest rates lower, investors have searched for higher returns in riskier assets such as stocks.
The Fed said Wednesday that it would scale back its stimulus to $75 billion a month, citing the economy’s growing — even if disappointing — strength.
“We had to taper at some point,” said John Rutledge, chief investment strategist at Safanad in New York. “Ten billion a month is a good start.”
Starting in January, the Fed said, the central bank would start buying $35 billion a month in mortgage-backed securities and $40 billion a month of long-term Treasury bonds.
The bond market had a relatively muted reaction to the Fed’s plans.
Yields on the benchmark 10-year Treasury bond initially fell, according to Tradeweb. But then those yields ticked up to 2.89%, modestly higher from 2.84% on Tuesday. Bond prices move in the opposite direction of yields.
Rick Rieder, chief investment officer for fixed-income at financial giant BlackRock Inc., welcomed the Fed’s decision. He predicted tapering might nudge the 10-year Treasury’s yield up to around 3.25% by the middle of 2014.
“This won’t be a big shock for bonds, because there’s still plenty of easy money in the global financial system,” Rieder said in a note. “That’s not to say rates won’t move higher over time.”
Investors were comforted that the Fed stood ready to continue supporting the economy as needed.
Some of Wall Street’s more optimistic market strategists saw the Fed’s move as a sign stocks could climb even higher before year’s end.
But few expect the stock market will be able to replicate this year’s performance in 2014.
Indeed, many market experts say the stock market is long overdue for a correction of 10% or more. Stocks haven’t weathered such a sharp pullback in about two years.
“It’s unlikely historically that you’ll get another year next year like this year, at least in equities,” said Larry Palmer, managing director at Morgan Stanley Private Wealth Management in Los Angeles.
The Dow rose 292.71, or 1.84%, to 16,167.97 on Wednesday. The S&P 500 jumped 29.65 points, or 1.7%, to 1,810.65. The technology-focused Nasdaq composite index gained 46.38 points, or 1.2%, to 4,070.06.
Research firm S&P Capital IQ predicts the S&P 500 will end 2014 at 1,895, about 5% higher than where the index stood Wednesday.
“Good years tend to follow great ones,” Sam Stovall, the firm’s chief equity strategist, wrote in a note, “and we continue to think that 2014 will be no exception.”
