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December 23, 2013 - Taper's Here, But The Party's Not Over

| December 23, 2013

Taper's Here, But The Party's Not Over

Weekly Update - December 23, 2013

Stocks broke their losing streak and rallied on the long-awaited Fed taper and positive economic news. The S&P 500 and Dow both finished out the week at record closes.[1] For the week, the S&P 500 gained 2.42%, the Dow surged 2.96%, and the Nasdaq grew 2.59%.[2]

Stock market activity last week shows that good news may finally be good news for markets. The other shoe finally dropped on quantitative easing; the Fed announced a modest taper of $10 billion, reducing the size of its monthly bond purchases to $75 billion. In order to make the tapering pill easier to swallow, the Fed pledged to keep rates near their current levels until the headline unemployment rate declines below 6.5%. If the Fed continues to wind down purchases by $10 billion per the Federal Open Market Committee (FOMC) meeting, that would put an end to quantitative easing by late 2014.[3] Stocks rallied on the news, taking it as an emphatic vote of confidence on the economy by the Fed.

In other Fed-related news, Janet Yellen, the nominee for chair of the Federal Reserve, cleared a major hurdle last week as the Senate voted to move forward with the nomination. A final vote is set for January 6 when the Senate returns from a holiday break.[4] Yellen is an experienced Fed hand, and it's likely that her main focus as chair would be to keep the Fed on a slow and steady path.[5]

In Washington, the Senate approved the bipartisan budget deal, avoiding any last-minute brinksmanship. The bill guides government spending into 2015 and will avoid another government shutdown and will eliminate some sequestration cuts. Though the deal avoids tackling the debt ceiling issue, it does address government spending and will decrease the deficit by approximately $20 billion over the coming years.[6]

On the economic front, markets surged when revised Q3 Gross Domestic Product (GDP) numbers were announced. New estimates of third quarter GDP growth indicated that the economy grew 4.1%, its fastest pace in almost two years. Economists increased their estimates of business and consumer spending as well as exports, which show that the economic recovery is still steaming along.[7]

Looking ahead at the holiday-shortened week, there's not a lot of economic data on the wire, and it's likely to be a slow week. Regardless of what happens in the final weeks of the year, 2013 will stand out as a banner year for equity performance. It's hard to know whether to expect a correction at the beginning of the year, but a pullback could provide good buying opportunities as long as fundamentals remain strong.


Monday: Personal Income and Outlays, Consumer Sentiment
Tuesday: Durable Goods Orders, New Home Sales
Wednesday: All Markets Closed for Christmas Holiday
Thursday: Jobless Claims, EIA Petroleum Status Report

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


Weekly unemployment claims rise. According to the most recent Labor Department report, initial unemployment claims rose to their highest level since March. Other labor market indicators show improvement, leading economists to largely discount the increase and attribute it to seasonal factors.[8]

Home resales fell in November. Sales of previously owned homes fell in November by 4.3% to the lowest level since December 2012. This was the third straight month of declines as rising interest rates dampen homebuyer activity. However, analysts believe that housing market fundamentals remain solid and that demand for housing still exists.[9]

Retailers pull out all the stops to lure shoppers. Retailers are down to the wire and are making serious last-ditch efforts to bring in more sales. Many retailers are advertising half off coupons and deals similar to those available on Black Friday. Early data suggests that the holiday shopping season has been soft, leading to aggressive promotions.[10]

EU loses AAA rating. Ratings agency Standard and Poor's downgraded the European Union's sovereign credit rating to AA+, citing tensions between member states and a deteriorating financial situation. S&P had recently cut its ratings on the Netherlands and France and believes that the wider region faces growing risks.[11]

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

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