On the day the Federal Reserve affirmed that it would begin tapering away its asset purchase program later this year, the S&P 500 Index declined by 1.4%. Annaly Capital (NYSE:NLY), which has been pressured of late along with other high-yielding mortgage REITs, shed 2.77%. I had anticipated that the Federal Reserve would come to its senses regarding the damage its "tapering" comments have had on long rates and stock market volatility, but it seems it has not. It is clear now that until the Fed sees real damage to the economy, it will not come off its current trajectory, however premature the market is indicating it is in its plans. Annaly will probably remain pressured as a result and so investors may want to look for opportunities to reduce exposure.
Long rates started higher in early May on market speculation about the Federal Reserve and its asset purchase program. Then on May 22nd, the release of the FOMC meeting minutes offered evidence of member consideration of the same. Despite the Federal Reserve chairman's reassurances that nothing was going to happen without economic cause and that all actions would be mutually exclusive, rates moved higher. Among rates on the rise were 30-year mortgages, and with that a commensurate decline in mortgage activity.
We thought that coming into the Federal Open Market Committee (FOMC) meeting this month, the Fed members would be sure to halt the trend. We suggested in our article, The Fed Had Better Fix This Mess Next Week, exactly the urgency with which the Fed should approach the issue. Specifically, I said what would be needed is "...clear communication from the Fed chief that asset purchase programs, while always under consideration, were not going to end anytime soon… That should be adequate enough to reverse the spiking trend of interest rates, which began in early May on speculation about future Fed action." However, with all the mitigating commentary by the Fed chairman in his press conference yesterday, he still said explicitly that the tapering of asset purchases would likely begin later this year and end next year.
The market simply will not have it, and it expressed its viewpoint that such action would be premature by selling stocks, bonds and a bunch of other asset classes as well. It simply will not approve of tapering this year and is sending its message loud and clear. I believe the market will eventually have its way as well, but investors in Annaly Capital, American Capital Agency (NASDAQ:AGNC) and other at-risk securities should probably not fight the Fed, whether it is right or wrong.
SPDR S&P 500 (NYSEARCA:SPY)
American Capital Agency
Two Harbors (NYSE:TWO)
Yesterday's decline in these shares is indicative of the Fed's mistake of ending the purchases of mortgage-backed securities purchases prematurely. However, the Fed does not see what the market does, a still vulnerable and inadequate economy. That was evident in yet another inadequate adjustment of its GDP forecast yesterday, a terrible failing. Therefore, I reiterate, we cannot fight the Fed, whether it is right or wrong, and so at-risk holdings should be sold at the best opportunity.