September and October were active in terms of headlines but very little in terms of change. The Federal Reserve surprised many analysts when they decided not to begin tapering QE at the September meeting. At the time, the decision garnered many critics considering the persistent signs of economic improvement in our country but looks appropriate now that we are on the other side of the 17-day government shutdown.
A lot has been written about the bond markets recently and much of it has unfortunately been misguided. Bond prices did move lower in May and June as interest rates rose on talk of tapering by the Federal Reserve but what the media has missed is that the bond market is fundamentally different from the stock market and a pullback in one can’t be compared to a pullback in the other.
Most markets took a step back in August on the lowest daily trading volume since April 2007 as investors prepared for a series of approaching policy decisions. The S&P 500 lost 3.1%, the largest one month drop since May, 2012, which speaks more to the strength of the market over the past year than the size of the current pullback. Good markets always have bad months from time to time.
The market resumed its march higher in July after recovering June’s losses. The selloff was sparked by talk of the Federal Reserve beginning to taper the monthly bond purchase program known as QE. The market rallied back in July as Fed governors made every effort to clarify that they have no intention of tightening monetary policy anytime soon which is far different from tapering. Perhaps what was most striking about July was the drop in volatility.
The economy has improved to a point where we can more clearly see a post Quantitative Easing (QE) world on the horizon and the market has responded with a jump in volatility and the first 5% pullback of 2013. Chairman Bernanke sparked the move when he explained the Fed’s time table for exiting QE following the Federal Reserve’s FOMC meeting on June 19th.