Stocks sharply higher on Fed stimulus cut
NEW YORK — The stock market had a swift and clear reaction to the Federal Reserve's decision to trim its stimulus efforts: That wasn't so bad after all.
Stocks surged on Wednesday, lifting the Dow Jones industrial average nearly 300 points to another record when the Fed decided the economy was strong enough for it to begin a modest reduction of its bond purchases.
“Investors should see this as a vote of confidence for the economy,” said Kristina Hooper, head of U.S. investment strategies for Allianz Global Investors.
The central bank tempered the impact of its pullback by signaling that it plans to keep short-term interest rates at record lows for longer than previously thought.
Investors had long anticipated the Fed would pull back on its purchases but did not think it would happen until next year.
Because the market had grown accustomed to stimulus, some investors had worried about a decline in stocks once the market got less rocket fuel.
Instead, the Dow jumped 292.71 points, or nearly 2 percent, to 16,167.97 — another high for the blue-chip index. Shortly before the Fed announcement at 2 p.m., the Dow was up just 47 points.
The broader Standard & Poor's 500 index rose 29.65 points, or 2 percent, to 1,810.65, and the Nasdaq composite rose 46.38 points, or 1 percent, to 4,070.06. All 10 sectors of the S&P 500 ended the day higher, with health care and banking up the most.
The rally adds to what has been a historic run for stocks. The S&P 500 is up nearly 27 percent, its best yearly performance since the dot-com boom of the late 1990s.
The Fed's decision removes a huge amount of uncertainty for investors, something they hate. The fate of the stimulus program had hung over investors' heads since May. Now that investors have an outline for how the Fed will pull back, they can move forward.
“The Fed believed the market could handle it,” said Art Steinmetz, president and chief investment officer at OppenheimerFunds.
With no economic downturn on the horizon, stocks are expected to continue their rise in 2014. Market strategists predict gains of 6 percent to 8 percent.
Starting in January, the Fed will reduce its bond-buying program to $75 billion a month from $85 billion. The reductions, referred to on Wall Street as “tapering,” will be the first step toward winding down a program that has been in place, in one form or another, since the financial crisis.
By purchasing bonds and holding down long-term interest rates, the Fed has encouraged borrowing and hiring. But all that buying has led investors to shift money into stocks. That's because the Fed's purchases make bond prices artificially more expensive in comparison to stocks.
The program has given the Fed a big role in the bull market. The S&P 500 index has surged about 26 percent since the Fed announced a year ago that it would buy the $85 billion in bonds each month. And since the central bank's first round of bond buying at the end of 2008, stocks have soared about 124 percent.
In the last month, as signs emerged that hiring was picking up, the housing market was improving and manufacturing was strengthening, investors grew more confident that markets could gain traction without stimulus.
The Fed said it is likely to keep cutting its bond purchases. Fed Chairman Ben Bernanke, who is nearing the end of his tenure, said the bank will likely vote for “measured reductions” at upcoming meetings, as long as the economy shows improvement.
Bernanke said Janet Yellen, who becomes Fed chairwoman once she is confirmed by the Senate, “fully supports” the decision to start reducing the stimulus.
Wednesday's pullback was unexpected for many. Strategists and economists thought the Fed would wait until March. It wound up being a welcome surprise.
“We finally have something in motion,” said Frank Davis, director of trading at LEK Securities “and we have details on how it's going to work, so it's something the market can embrace.”
The government bond market had a mild reaction to the Fed's announcement. The yield on the benchmark U.S. 10-year Treasury note fluctuated throughout the day but ended up slightly at 2.89 percent, from 2.84 percent late Tuesday.
The dollar rose against the euro and yen.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Insurer Aetna to buy Humana in $35B deal
- U.S. calls Fiat Chrysler recall record dismal
- Critics find hotels’ hidden fees to be inhospitable
- 2Q mutual fund review: Momentum stalls
- U.S. employers add 223K jobs, jobless rate falls to 5.3%
- Facebook lures premium content from YouTube
- Halliburton to close Indiana County office
- Obama overtime proposal slammed
- Rules holding for-profit schools accountable for student earnings go into effect
- Alpha Natural Resources buys out European partner in Marcellus venture
- Big Heart Pet Brands to leave Pittsburgh, affecting 225 jobs