In the aftermath of the Great Recession, it took about five years for the US central bank to begin to slow down its controversial large-scale bond-buying program, ultimately making 2013 the year of the “taper tantrum”.
Federal Reserve officials have said they would rather avoid a repeat of this episode, when it comes to possibly slashing its $ 120 billion per month asset purchase program in the era of the pandemic. .
And while it looked like the US stock and bond markets were both panicking in 2013, a review of the S&P 500’s SPX,
the performance of this tumultuous year shows that equity investors have been quite successful in staying the course.
After falling about 6% after the Fed’s announcement of the withdrawal, the S&P 500 ended the year up about 30%, according to the Wells Fargo Investment Institute.
At the same time, the yield of the 10-year Treasury TMUBMUSD10Y,
nearly doubled in six months, from a low of nearly 1.5% to about 3.1% in December, leading to higher borrowing costs that trickled down to the U.S. economy, as homeowners commercial buildings to American companies LQD,
To verify: Foreign purchases of US corporate debt take off, even if the Fed no longer buys
“Higher inflation, rising long-term interest rates and a less accommodating Fed could potentially cause the market to pause,” Chris Haverland, Wells Fargo Institute global equity strategist, wrote in a note Monday.
“However, stocks have historically performed well through these events even though there was initial selling pressure.”
Haverland believes the Fed may announce plans to cut back on asset purchases later this year, which could raise longer-term Treasury rates, including the 10-year, from their current range of 1.3%. He also prefers to stick to his wheelhouse in stocks rather than bonds.
“If the market corrects, we will see an opportunity to fill our positions in equities which may be below strategic or tactical objectives,” he said.
Read: Watch the Fed tiptoe towards the cut this week
During the pandemic, the Fed bought about $ 80 billion in treasury bills each month and $ 40 billion in agency mortgage-backed securities (MBS), while increasing its balance sheet to about $ 8.2 trillion. .
Some Fed officials are wondering if now is the time to start downsizing central bank agency MBS MBB,
the purchase, as a first step in pulling out some support, especially since the US real estate market has been hot during the COVID crisis, albeit with recent signs of cooling.
To see: New home sales drop to lowest since pandemic as high costs and slim choices frustrate buyers
The Federal Reserve will begin a two-day policy meeting on Tuesday, with a statement scheduled for Wednesday at 2 p.m. EST, followed by a press conference by Fed Chairman Jerome Powell.
US stocks drifted higher into record territory on Monday, with the Dow Jones Industrial Average DJIA,
S&P 500 and Nasdaq Composite Index COMP,
claiming new closing highs.