Markets “In a Nutshell” for August 23, 2021
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average fell 1.10%, the S&P 500 was down 0.60%, and the NASDAQ fell 0.70%. Foreign stocks (MSCI EAFE) were also down, declining 2.90%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 1.26%. (Data source: Wall Street Journal)
Last week the minutes from the most recent Federal Reserve meeting were released and showed that talks of tapering asset purchases were gaining steam. The Fed has been very adamant that they would give the timing of their plans to taper asset purchases as they try to avoid another “taper tantrum” as we saw in 2013 when the market had a negative reaction to hearing the Fed would taper asset purchases. The Fed has their annual Jackson Hole Economic Symposium this week and much attention will be toward Chairman Powell’s speech as he will give an updated on the economy. It is expected that a timeline of the Fed’s tapering will have more detail within the next month.
What the Tapering Means for Markets
Currently the Federal Reserve Bank is buying $80 billion of Treasury securities and $40 billion of agency mortgage backed securities a month. When the Fed talks of tapering these asset purchases it does not mean they will go from $120 billion a month to $0 but rather slowly work its way down to lower levels. For example, in 2013 the Fed reduced their monthly asset purchases by $10 billion a month starting the decline from $85 billion to $75 billion. This will allow the market to slowly absorb the decline and not cause any dramatic changes to the market. Although the Fed is expected the announce their taper timeline soon they are still keeping economic conditions favorable for markets as rates remain low for the near future.
How much did equity markets drop in reaction to taper talks in 2013? (Scroll Down for Answer)
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4. 5.7%, in 2013 the talk of tapering bond purchases from the Fed led to a spike in Treasury yields and a 5.7% decline in the equity market.