With the Federal Reserve nearing a decision to begin tapering its asset purchases, we thought it would be beneficial to look at what occurred the last time the Fed reduced its asset purchases. In this analysis, we looked at the events surrounding the 2014 taper, how different markets and asset classes performed during the period, and what we believe may (and may not) be expected this time.
The timeline shows the key events leading up to the 2014 taper. The Fed’s decision in 2012 to pursue a third round of large-scale asset purchases (QE3) came within the context of an economy that was still slowly recovering from the Great Financial Crisis (GFC) of 2007/2008.
The Federal Open Market Committee (FOMC) in September 2012 noted that the Fed was concerned that without further accommodative policy, economic growth would not achieve a level consistent with the bank’s dual mandate of price stability and full employment. Inflation, as measured by Core PCE (Personal Consumption Expenditures), was persistently below their 2% target level since the GFC. In September, Core PCE was 1.7% and the unemployment rate was 7.8%.
As the economy improved in 2013, investors watched for signs that the Fed might become less accommodative. The first public commentary came in May 2013, when Federal Reserve Chairman Ben Bernanke mentioned the possibility of a taper at a congressional hearing. Markets were clearly taken by surprise, as the stock market sold off by 5% and yields moved sharply higher.
The official announcement of the Fed’s plan to taper asset purchases came at the FOMC meeting in December of 2013. Beginning in January 2014, the Fed began to reduce the pace of its purchases by $10 billion per month, ending with the last round of purchases in October 2014.
The charts below show the unemployment rate and Real GDP in the United States from 2008 – 2015.
Source: Putnam, Federal Reserve Bank of St. Louis
Before looking at market performance in 2013-2014, it is important to note two factors relative to where we are today compared with the time of the last taper. The first is that the Fed has been more transparent in communicating its intentions to taper this cycle as opposed to the last. The second is the state of the economy. Today, unemployment is below 5%, real GDP is expected to be above 3.5% for the third quarter, and inflation has been both higher and more persistent than many market participants anticipated. The economy is in a much better position today than it was at the start of the 2014 taper.
Market performance: 2013 – 2014
The charts below look at market performance in the periods preceding the taper, as well as during the months the Fed was tapering. Most notable was the move in bond yields after Bernanke’s Congressional testimony in May 2013. The chart below shows the yield on the 10-year note, with the benchmark bond yield rising a full percentage point, giving way to the term “Taper Tantrum” being used to describe this period. Once tapering had begun, 10-year yields fell, ending October 2014 around 2.4%
Source: Putnam, Bloomberg
Looking at the broad market, we can see that performance varied in the months leading up to 2014. However, markets were broadly positive while the Fed was actually tapering.
Source: Putnam, Bloomberg.
Indices represented in chart: S&P 500 Index, NASDAQ Composite Index, MSCI Emerging Markets Index, Bloomberg US Corporate Bond Index, ICE BofA 1-3 Year US Corporate Index, J.P. Morgan Developed High Yield
Small-cap companies outperformed large-cap companies in the months preceding the start of tapering but lagged during the taper. Growth led value in both periods, however, only by a modest margin.
Source: Putnam, Bloomberg
We also looked at performance at the S&P 500 Index sector level during the months the Fed was tapering. Real estate, health care, and utilities led, with each rising more than 20%, while energy was the only sector with negative returns during the period.
Source: Putnam, Bloomberg
As of this publication, the Fed looks poised to announce its plans to reduce its asset purchases in November, with the taper beginning either immediately or in December. The minutes from the September 2021 FOMC meeting point to mid-2022 as the end date of the Fed’s asset purchases. If history is any guide, the process of tapering should not be taken as a certain sign of any upcoming market weakness. The Fed’s plan has been well telegraphed, and the economy is on a strong footing. In addition, while the Fed’s monetary policies will gradually become less accommodative, from a historical perspective it is still poised to be extremely accommodative throughout 2022.
The S&P 500 Index is an unmanaged index of common stock performance. The Nasdaq Composite Index is a widely recognized market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes over 3,000 stocks. The MSCI Emerging Markets Index (ND) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers. The ICE BofA (Intercontinental Exchange Bank of America) 1-3 Year U.S. Corporate Index is an unmanaged index of U.S. investment-grade corporate debt with a remaining term to maturity of less than 3 years. The JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries. The Russell 1000 Growth Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their growth orientation. The Russell 1000 Value Index is an unmanaged index of those companies in the large-cap Russell 1000 Index chosen for their value orientation. The Russell 1000 Index is an unmanaged index composed of approximately 1,000 of the largest companies in the Russell 3000 Index as measured by their market capitalization. The Russell 2000 Index is an unmanaged index composed of approximately 2,000 of the smallest companies in the Russell 3000 Index as measured by their market capitalization.
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