Wednesday, December 18, 2013

Stock Market: Celebrating The Taper

(Drivebycuriosity) - Finally the taper is here. Today the Federal Reserve announced that they will scale back their massive stimulus program QE3 (taper), beginning in January. Shortly after this announcement the stock market jumped. The S&P 500 rallied more than 2% and closed on an all-time high. Why this rally?

1. This announcement - and the taper - was already priced in. In the last 4 weeks the stock market went nowhere and has been crumbling since start of December in spite of strong economic numbers.

2. The taper is a sign of economic strength. Today´s announcement is an an acknowledgment that the US economy doesn`t need the stimulus any more (or at least less). The economic data (job market, retail sales, industrial production, home prices and more ) show that the economy is getting stronger.

3. The stock market isn´t afraid of rising interest rates. Stock prices (value of the company) depend on expected company profits, discounted with the interest rate. Higher interest rates imply a bigger discount. Everything equal this translates into a lesser value of the stock. But we live in a world where nothing stays equal. A stronger economic growth also implies that company profits will be higher and will rise faster, thus over-compensating the negative impulse from the interest rates rise.

I believe that today´s taper announcement set the course for the next stage of the rally.

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