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On Nov. 3, the Fed stated it would begin tapering asset purchases starting later this month, with a monthly reduction of $10 billion in Treasuries and $5 billion in mortgage-backed securities.
Unlike 2013’s taper tantrum, markets reacted positively. On Wednesday afternoon, broad market equity ETFs like the SPDR S&P 500 ETF Trust (SPY) rose on the news after trading sideways for much of the morning.
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Fed funds futures contracts also did not show significant movement, with little change in the target rate probabilities through December 2022’s Fed meeting, according to the CME FedWatch Tool.
Target Rate (bps)
1 Day Prior
Powell’s clear communication over the last several months was deliberate—an effort to avoid what happened during the “taper tantrum” of 2013. In the statement after the previous FOMC meeting, the Fed had noted that tapering was likely, with a $15 billion monthly reduction in asset purchases expected to begin this November or December.
That stands in contrast to 2013, when equity and bond markets reacted negatively to then-chair Ben Bernanke’s comments in May of that year, wherein he suggested the central bank would soon begin tapering. The comments caught the market off guard, showing up in the performance of several ETFs.
Though markets were prepared for Powell’s guidance this time, looking at what happened in 2013 can still give us some insight into the path forward for the market.
Brief Wobble For Domestic Equities
Bernanke’s testimony on May 22, 2013 caused equity markets to stumble for the next month. SPY fell by 5.6% from May 22 to June 24, while the iShares Russell 2000 ETF (IWM) dropped by 4.6%.
ETFs—and domestic equity markets in general—would recover and rise by more than 30% for the year. While the economy at that time faced an unemployment rate of 7.6%, Bernanke stated that tapering would begin “if we see continued improvement and we have confidence that that’s going to be sustained.” The economy was moving in the right direction, so equities trending up was to be expected.
Similarly, equities could have a positive path from here. Powell noted that “indicators of economic activity and employment have continued to strengthen.” Just as in 2013 markets, however, the economy faces challenges. Today, those challenges are elevated inflation and supply imbalances that could threaten further appreciation.
Differing Fates For International Equities
In 2013, developed and international equities saw similar declines beginning in May. But developed markets recovered, while emerging markets ended the year in the red.
The iShares MSCI EAFE ETF (EFA) followed a similar but more severe pattern as domestic equities, falling by 10.2% from May 22 to June 24. The developed international ETF ended the year with a 21.4% gain.
The iShares MSCI Emerging Markets ETF (EEM) fell by 15.6% during that same time period, and while the emerging market ETF recovered, it still ended the year with a loss of 3.7%. Emerging markets’ struggle in the subsequent months reflected the market’s “risk-off” attitude.
Emerging market countries tend to suffer when rates increase in the U.S., as investors prefer to own these higher-yielding U.S. assets.
Today, China’s government crackdown on various sectors of the market also presents a risk to the broader emerging market space. However, these countries also have some factors working in their favor, with strong growth prospects and increasing vaccination rates being a tail wind for this space.
Bond Market Fallout
The bond market saw the worst effects of the taper tantrum in 2013, with the 10-year U.S. Treasury yield rising from 2.0% on the date of Bernanke’s testimony to 3.0% at the end of the year.
As to be expected, the iShares 20+ Year Treasury Bond ETF (TLT) was hit the hardest, with the long-dated bond ETF falling by 13.4% for the year. The iShares Core U.S. Aggregate Bond ETF (AGG) was down by 2.0%.
The iShares iBoxx USD High Yield Corporate Bond ETF (HYG), on the other hand, rose by 5.8% for the year. High yield has a higher correlation to equity returns than it does to investment-grade bonds.
Though high yield spreads initially widened on Bernanke’s comments, the strengthening economic environment allowed for spreads to narrow through the rest of the year, goosing returns for this area of the bond market.
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However, with high yield spreads currently at historically narrow levels, the outlook for HYG today is not quite as rosy as it had been in 2013.
As noted in this article, there are many factors that make this market environment different from it was in 2013. The Federal Reserve seems committed to keeping markets running as smoothly as possible, but the pandemic is still ravaging parts of the world and inflation is a much more significant threat.
Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.” In spite of these differences, it’s possible that at least parts of the market will see echoes of 2013 in the months ahead.