Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
What a difference six months makes! It used to be that the mere hint of an impending slowdown in the Fed's $85 billion monthly bond-buying program (a.k.a. the "taper") was enough to send stock and bond markets in a swoon. Today, the Fed finally announced it would begin the taper next month and -- what do you know? -- the S&P 500 and the Dow Jones Industrial Average (DJINDICES: ^DJI ) end the session on record highs, off daily advances of 1.7% and 1.8%, respectively. Note the upward spike starting at 2 p.m., when the Fed released its statement:
Gold has had a dreadful 2013. Year to date, the most popular gold vehicle, the SPDR Gold Shares, has lost roughly a quarter of its value, with virtually all of that decline occurring since May 21, the day Fed Chairman Ben Bernanke first alluded publicly to the possibility of a taper. Today, the ETF fell 0.9%, with all of that decline (and more) occurring after 2 p.m.:
The taper is negative for gold because it signals improvement in the economy and financial markets -- things are getting back to normal. Conversely, the perceived risk of financial calamity has decreased, which reduces the catastrophe insurance premium people have been willing to pay to own gold. Today marks a milestone in the bear market for gold, but another extraordinary Fed policy will continue to provide some support for the price of the metal. Indeed, zero interest rates look firmly rooted for some time yet, which reduces the opportunity cost of holding a zero-yield asset such as gold. (Everything I have said here applies to silver and the iShares Silver Trust (NYSEMKT: SLV ) ).
Bank of America rose 3.4% today, with the entire gain occurring after 2 p.m.:
in fact, the banking sector as a whole outperformed the broad market: The KBW Bank Index was up 2.1%. In my view, this reflects a number of factors:
- The taper reflects the perception that the recovery is taking hold, which, for banks, raises the prospect of accelerating loan demand and lower loan charge-offs (or reversals of prior reserves).
- The taper also suggests that policymakers believe the financial system is safer and more stable. The notion of systemic risk has weighed heavily on the valuations of large banks since their bailout in 2008 and Bank of America was front and center in that regard. More than five years after the original capital injection by the government, the shares still trade at a 23% discount to their book value.
Admittedly, today's taper amounts to a very gradual slimming diet: The Fed will reduce its monthly securities purchases by only $10 billion. Furthermore, its statement and accompanying materials emphasize that policymakers expect short-term interest rates to remain at rock-bottom for a long time to come. Still, I think it's an important milestone and one that stock pickers ought to appreciate since it brings us one step closer to a market in which we can fully focus on company fundamentals and business values without the intense, distracting buzz surrounding Fed policy.
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