Spark Trader Limited reports:
The taper in 2013, the Fed’s balance-sheet contraction and even its surprise rate hike in 2017 all suggest that US stocks will not be badly hit when the central bank starts to taper bond purchases, Barclays says.
Barclays strategists led by Maneesh S. Deshpande wrote in a note On Tuesday:
“The directly relevant precedent is the tapering of QE3 in 2013 and can be compared on that basis. However, the chronology of events is important in gauging potential responses in the coming weeks. In particular, the relevant time frame, in our view, is not the ‘taper tantrum’ of May 2013, but the actual start of tapering in December 2013.”
“Bernanke first raised the possibility of tapering at a Congressional hearing on May 22, 2013, which immediately triggered a ‘panic’ in interest rates, which soared by about 100 basis points from May to June and continued to rise for the rest of 2013. On the other hand, the impact on stocks was relatively mild and short-lived: U.S. stocks fell 5.8% (From May 21, 2013 to June 24, 2013), but rebounded in July.”
Deshpande added that the Fed has done a better job of taper communication this time, with rates actually falling and the S&P 500, Nasdaq and Dow hitting record highs.
Deshpande noted that the Fed’s return to balance sheet normalization was announced in June 2017 and officially started in October 2017. This was a more powerful move, as it actually led directly to a decline in liquidity (unlike when the taper taper began with only a pause in the pace of liquidity injections), but there was almost no reaction from US equities. Deshpande further explains:
“Even an unexpected move in the federal funds rate will only lead to small moves in the stock market. Our model predicts that if the Fed unexpectedly raised rates by 25 basis points, the stock market would fall by only 80 points. However, investors’ response depends on previous equity returns.
So while the average stock market is down about 80 points, it would only be down about 60 points if stocks stayed in a range until the Surprise fed meeting. If the stock market had risen 5 per cent last month, an unexpected quarter-point rate hike would have caused the S&P 500 to fall only 1.4 per cent.”
In addition, the Fed’s tapering could continue to boost big tech stocks, says Seeking Alpha contributor ZMK Capital.