Fed Tapering History - Revealing Data Investors Need To Know

Nov. 18, 2013 10:43 AM ETDD, MUB, PFF, PGX, PSK, PZA, SHM, SPY, TLH, TLT4 Comments
Daniel R Moore profile picture
Daniel R Moore

The buzz in the media over the past year has been focused on the upcoming Fed taper. How useful is Fed asset buying as a signal for a change in the prospects for stocks? After all, the Fed constantly performs open market operations, and the market participants on the other side of the trade are equally good at playing the Fed's next market move for economic gain. Usually broader market measures to understand the impact of Fed policy on the stock market are better suited for the job. The most obvious indicator is the movement of interest rates, which in a due course are always inversely correlated in relative measure to asset value. This statement is true even in today's rate controlled Treasury market.

But the "taper" is the market focus, and therefore, understanding how the market has historically reacted when the Fed slows asset purchases, or reduced the size of its balance sheet is useful information for investors. More useful, it seems, because the Fed has interjected itself so forcefully into the market for financial assets since September of 2008, and also steadfastly held to a policy of zero-bound Treasury rates.

To create an understanding of how a change in direction of Fed policy impacts the stock market, I dug into the data dating back to FDR and WWII through the present day. The data is captured in two graphs which follow in this article. Both graphs capture the yearly rate of change in the Fed balance sheet holdings of U.S. Treasuries and other assets such as Mortgage Backed Securities, adjusted for inflation. The timing of historical stock market corrections are overlaid on each graph. Two distinct periods were analyzed - WWII through the early 1970s, and 1971 until the present day.

Tapering Relative to Stocks - 1941 through 1970

This article was written by

Daniel R Moore profile picture
Daniel Moore is the creator of FinancialRelativity.com, a web portal created for the purpose of tracking the status of financial markets and providing investment analysis and portfolio management insights to investors. Based on the systematic investment research, he writes about the market and publishes his views through internet market publications. He has over 25 years of management experience in corporate finance in a variety of high technology start-ups and public companies. A graduate of Duke University’s Fuqua School of Business in 1988, he has spent the last 10 years managing investment portfolios seeking high risk reward returns for fixed income investors.

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