Adam Shell, USA Today
NEW YORK - There was no "taper tantrum" this time on Wall Street. Instead, there was a "taper-tape" rally.
The Federal Reserve finally did what it had hinted about doing way back in May: It announced that it was going to start dialing down, or "tapering,"
its market-friendly $85 billion-per-month bond-buying program in
January. Starting next month, the nation's central bank said it would
start trimming its purchases by $10 billion per month.
TAPERING BEGINS: Fed to cut bond purchases by $10B in January
FIRST TAKE: Fed action shows economy's strength
despite fears that the stock market would crumble at the first sign
that the Fed's quantitative easing program, or QE, would start going
away, the Dow Jones industrial average rallied 293 points, or 1.8%, to its biggest gain since Oct. 10, and to a new all-time high of 16,167.97.
past two times the Fed warned of tapering, the Dow fell - 4.9% back in
May and June, and 5.6% in August. The declines were dubbed "Taper
Tantrum 1" and "Taper Tantrum 2."
STOCKS: Dow, S&P 500 hit new highs on Fed's "Taper Lite"
2014 OUTLOOK: Will next year be another slam dunk for stocks?
So why did stocks go up when most pundits figured they would go down?
Here are five theories why the first taper didn't tank the stock market:
1. It signals the Fed's faith in recovery.
"The markets have it right," says Joe Quinlan, chief market strategist
at U.S. Trust. "Tapering is a sign of improving economic growth and a
significant step towards the normalization of interest rates."
Indeed, the Fed easing its foot off the gas pedal is proof that the recovery has some legs and is sustainable.
2. It reduces uncertainty.
Now that the Fed has moved, it removes many of the question marks
surrounding the taper, says David Kotok, chief investment officer at
"The taper announcement lowers the
uncertainty premium," says Kotok. "We now know they will be gradual.
They will not shock the economy. They will be slow to tighten, as they
said tightening (of short-term rates) is two years or more away. They
see inflation as too low. Lots of air got cleared now that they have
3. It amounts to "Taper Lite." The Fed's
decision to trim just $10 billion per month is viewed as a rather modest
taper, and one that keeps the Fed very much in the asset-buying game.
In fact, it is a scenario that Thomas Tzitzouris, an analyst at
Strategas Research Partners, dubs "Taper Lite."
4. It caught Wall Street off guard.
The stock market sold off in recent days heading up to today's
meeting, and now is simply "buying on the news," says James Paulsen,
chief investment strategist at Wells Capital Management. "The market is
in catch-up mode."
The Fed, adds Paulsen, has also given the market a "vote of confidence in the future."
5. It doesn't change the Fed's dovish stance.
The Fed not only kicked off the taper in a gradual way, it also
provided more dovish guidance on the fate of its low interest-rate
policy. It now says that it will keep short-term rates at roughly 0%
until "well past the time that the unemployment rate, now 7%, declines
The takeaway: The Fed will remain highly accommodative for years.
Paul Hickey, co-founder of Bespoke Investment Group: "The market has
been cognizant of the fact that this was going to happen at some point
in the near future, so now that it has happened it is one less thing to
worry about. Additionally, the rest of the statement was dovish."