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Market Report Tapering

Market Report Tapering

Markets were shaken by tapering fears this week. Following last week’s unexpected upturns in GDP growth and job creation, investors worried that the Federal Reserve would begin cutting back on stimulus. These fears were compounded by the budget deal that Congress reached on Tuesday. The deal was good news for the economy – meaning that the fiscal crisis and government shutdown that happened earlier this year should not occur again for at least two years. At the same time, it was another step bringing our economy closer to tapering. With a budget deal struck and economic data looking positive, the Fed now seems poised to begin reducing stimulus – potentially this month. Stock indexes began to falter on Tuesday after the budget deal, and fell steadily on Wednesday, with the Dow Jones witnessing a 130 point drop, and the S&P 500 falling below 1800. Treasury yields, after stabilizing somewhat last week, started spiking once again in the middle of the week.

Indices Week % MTD % YTD % 3 Yr. % 5 Yr. %
S&P 500 -1.61 % -0.17 % 27.06 % 15.15 % 17.63 %
Russell 2000 -2.11 % -0.34 % 31.96 % 14.34 % 20.44 %
MSCI EAFE -1.57 % -1.23 % 16.50 % 6.56 % 12.35 %
Barclays Ag. Bond 0.14 % -0.07 % -1.82 % 3.43 % 4.87 %
10 Yr. Treasury -1.34 % -6.41 % 2.38 % 2.84 %
Commodities Week % YTD %
Gold -0.31 % 0.32 %
WTI Crude Oil -1.08 % 5.21 %
Natural Gas 5.76 % 29.84 %

Equities

Equity markets were hit hard this week by tapering uncertainty. After pushing out weak gains on Monday, the Dow witnessed steep declines throughout the middle of the week, falling 52 points on Tuesday, 130 points on Wednesday, and another 104 points on Thursday. The S&P 500, after having reached record-breaking highs over 1800 points last week, fell below 1780 on Wednesday. The Nasdaq and Russell 2000 slipped as well, but witnessed slight gains early on Thursday. The S&P 500 continued its downward trend on Friday, while the Dow Jones started looking up and recouped 16 points.

Aside from the tapering talk, a major stock market event occurred this week as Facebook was nominated to join the S&P 500 index, taking the place of semiconductor developer Teradyne. Facebook’s stock made a rocky entrance into the market in 2012, with its highly-anticipated IPO botched by trading delays and ordering glitches. Many believed that the stock had been overpriced to begin with, falling from its IPO price of $38 to as low as $22 per share. In 2013, however, Facebook became one of the best recovery stories on the market – regaining its IPO price, pushing up into the high forties, and now hovering around $54. Becoming a part of the S&P 500 index is a critical symbolic step for the social networking site, establishing it as one of America’s top companies.

Fixed Income

Following investors’ fears that the Fed could begin tapering this month, bond yields headed upward after budget talks concluded. The U.S. 10-Year Treasury yield, which had hovered around the 2.75% threshold for the past few weeks, jumped to nearly 2.9%, and the 30-year Treasury reached 3.90% on Thursday. Though climbing interest rates are usually viewed as bad news for businesses – causing a corresponding fall in bond prices, and generally discouraging borrowing – the Wall Street Journal published an article this week pointing out that from the individual investor’s perspective, rising interest rates are not a bad thing. Corporate pension funds, which tend to invest in conservative bonds, have been profiting significantly from the rise in bond yields, delivering higher rates of interest to employees’ pension plans.

Commodities

Gold, which had recently witnessed precipitous drops in value, began to recover this week, climbing from $1225 per troy ounce to more than $1235. Other precious metal commodities, including copper and silver, saw gains to close out the week. In the midst of tapering and budget uncertainty, investors seem to be leaning toward precious metals as a conservative, inherently valuable asset. While metal futures were up this week, energy futures fell across the board. European Brent, which had traded over $111 per barrel, was down to $108 this week. WTI Crude Oil and natural gas also witnessed losses, with crude falling to $96 per barrel at the end of Friday’s trading session.

Foreign Markets

A major deal was struck in the European Union this Thursday regarding failing banks. During the financial crisis, banks across Europe failed, and many governments responded by using taxpayers’ money to bail them out. An accord was reached in Brussels this week that would shield taxpayers’ money from such controversial bail-out practices. The agreement places greater responsibility on creditors and large depositors, and mandates that banks put money into a bail-out ‘insurance fund’ in the event that a financial institution fails.  The move shows that the Eurozone is heading in a new direction – one of greater monetary transparency and accountability – and comes none too soon, following the collapses and subsequent bail outs of banks in Spain and Ireland using taxpayer money.

On the Horizon

Though the media hype surrounding tapering caused much volatility in the markets this week, some investors are seeing hope. CNBC published an article this week noting that, fundamentally, the beginning of tapering – and end of quantitative easing – is a good thing, because it means that our economy no longer needs to be propped up with artificial support by the government in order to function. The CNBC report posited that despite tapering anxieties, 2014 may present a “clear runway” for our economy to take off again. It remains to be seen how investors and markets will react when tapering officially takes effect, but perhaps there are more reasons to be hopeful than previously thought.