Fed frenzy: The Fed’s announcement last week that the long-anticipated tapering of its economic support will begin next month triggered a nearly 300-point leap in the Dow on Wednesday. Coupled with final passage of a two-year federal budget and encouraging economic data, that pushed the Dow industrials and the S&P 500 to fresh records after a two-week losing streak. Meanwhile, bond investors, who had been anticipating Fed tapering for months, left the benchmark 10-year Treasury yield essentially unchanged.
|Market/Index||2012 Close||Prior Week||As of 12/20||Week Change||YTD Change|
|Fed. Funds||.25%||.25%||.25%||0 bps||0 bps|
|10-year Treasuries||1.78%||2.88%||2.89%||1 bps||111 bps|
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week’s Headlines
- The Federal Reserve Board finally dropped the other shoe, and investors were relieved. The board’s monetary policy committee announced that it will cut its $85 billion monthly bond purchases by a modest $10 billion starting in January. Reductions will be split evenly between Treasuries and mortgage-backed securities, and the committee promised that the tapering process will be done in modest increments driven by ongoing economic data. The statement also indicated that the Fed’s target rate could remain at its current low level even after unemployment falls to 6.5%, especially if inflation remains low. Most members don’t expect to see a rate increase before 2015.
- U.S. economic growth continued to accelerate during the third quarter as gross domestic product rose more than previously thought. Initially estimated at 2.5%, GDP was up 4.1% from July through September. That’s the strongest growth since Q4 2011, and far stronger than the 2.8% seen a year earlier. A 2% increase in consumer spending and 4.8% growth in business spending helped drive the higher quarterly figures. The Bureau of Economic Analysis also said after-tax corporate profits rose 2.4%–slightly less than Q2’s 3.5% increase, but a dramatic 8.6% improvement over Q3 2012.
- A federal budget covering spending through late 2015 passed both houses of Congress and was signed by President Obama, eliminating the specter of another government shutdown. The next battle is likely to come in February, when the temporary suspension of the U.S. debt ceiling is scheduled to expire.
- November manufacturing data was generally encouraging. Industrial production rose 1.1% during the month, fueled in part by the fourth consecutive month of higher manufacturing output. The Federal Reserve said that was the largest increase since November 2012’s 1.3% and pushed industrial production above December 2007’s pre-recession high. Business productivity also improved; according to the Bureau of Labor Statistics, it rose at an annualized rate of 3% during Q3 as output increased 4.7% and hours worked rose 1.7%. Manufacturing data from the Empire State and Philadelphia Fed surveys showed little change in manufacturing conditions in either region, with both growing at roughly the same pace as in November.
- Consumer prices were unchanged in November, according to the Bureau of Labor Statistics. That put the consumer inflation rate for the last 12 months at 1.2%, slightly higher than October’s 12-month figure. Significant cuts in gas and natural gas prices offset November increases in other areas, primarily housing, airline fares, recreation, and used cars and trucks. Not counting food and energy, the Consumer Price Index rose 0.2%.
- Housing starts saw a strong increase in November, jumping almost 23% over the month; the Commerce Department said that put them almost 30% ahead of the previous November. Building permits, an indicator of future activity, slowed 3.1%, but were almost 8% higher than a year ago. Meanwhile, the National Association of Realtors® said that November’s 4.3% drop in sales of existing homes was the third straight month of lower sales and represented the first year-over-year decline in more than two years. However, the NAR also said the $196,300 median home price was up 9.4% from last November.
Eye on the Week Ahead
The holiday-shortened week leaves investors only a few trading days in 2013 to make any adjustments to their portfolios.
Key dates and data releases: personal income/outlays (12/23); durable goods orders, new home sales (12/24).
Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.