Stocks Close at Record Highs as Fed Steps Back

By ALEXANDRA SCAGGS
Updated Dec. 18, 2013 3:19 p.m. ET
Developing Story


NEW YORK—U.S. stocks and gold swung higher, and U.S. Treasurys see-sawed, after the Federal Reserve announced it would take a small step toward paring back of its aggressive efforts to support the U.S. economy.

The timing of the move surprised many investors, who had been expecting the Fed to hold off paring its $85 billion-a-month bond market purchases.

In the Markets




However, in setting only a one-time, $10 billion reduction of that bond buying in January, and committing to keeping interest rates low, the Fed's shift was a relatively cautious one.

"The Fed is telling investors that the removal of monetary stimulus will be on a gradual and measured pace." Gary Pollack, head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit which has $80 billion assets under management
The Dow Jones Industrial Average rose 250 points, or 1.6%, to 16125, on pace to close at a record high. The S&P 500-stock index rose 20 points, or 1.1%, to 1801. The Nasdaq Composite Index gained 21 points, or 0.5%, to 4044.

Stocks initially sold off on the news but rebounded in an instant. The S&P 500 fell as much as 13 points but turned positive moments later, amid heavy buying in products investors often use for short-term betting on moves in the overall stock market, such as S&P 500 futures and the SPDR S&P 500 exchange-traded fund.

"This is the most excitement we've had in a while," said Viren Chandrasoma, managing director in equity trading at Credit Suisse Group AG. "This was what you call a bear trap."
Mr. Chandrasoma said that the quick moves indicated that much of the trading came from fast-trading investors such as hedge funds, rather than the large money managers who tend to invest on a longer-term basis. Many investors have said they don't want to make large bets around the Fed, particularly after this year's roaring stock-market rally.

"There was plenty of noise. Now, was there a lot of trading? I don't think there was" outside of the futures market, he added.

Going into today's Fed decision, most investors had expected the Fed to keep in place its easing efforts even in the face of recent improvement in economic activity and a Congressional budget deal that addresses some of the fiscal policy uncertainties that have concerned investors.

"This is about as accommodative of a tapering statement as we were going to get," said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank, which manages about $170 billion. "But it is confidence-inspiring. If even the Fed has enough confidence [to pare purchases], that's a strong signal to the market.

Investors have been debating the potential impact of any such move by the Fed on the stock market. Some see Fed policy as having largely fueled the 2013 rally in stocks, which had the S&P 500 up 25% through Wednesday. Others have argued that stocks would be able to weather any paring back of the bond-buying program in large part because the Fed has made it clear it will maintain exceptionally easy money policies even with such a move.

With the Fed committing to keeping monetary policy easy, gold prices jumped.

Gold prices initially fell as low as $1,220 an ounce, down 0.8% from Tuesday close, in the minute after the Fed announced its decision. But gold for February delivery, the most actively traded contract, later erased those losses and pushed higher, recently trading up $11.50, or 0.9% at $1,241.60 a troy ounce on the Comex division of the New York Mercantile Exchange.

Many investors had expected gold price to fall further if the Fed followed through on its signals that it was preparing to taper.

But gold prices rallied following the decision. Some traders said that, in the gold market, a much larger cut to bond purchases was expected.

"$10 billion is a bit more of a symbolic move," said Adam Klopfensten, senior market strategist with Archer Financial Services LLC. "The reason gold is holding right now is that gold is the only asset class that priced in a taper. The other asset classes did not."

Gold prices are down 26% year to date.

The yield on the 10-year Treasury note initially hit a three-month peak following the Fed statement. Bond yields move in the opposite direction of prices. But yields then pulled back as investors stepped in to snap up U.S. government debt at interest rates neared 3%. Recently, the 10-year Treasury note was 8/32 lower in price, yielding 2.872%, according to Tradeweb.

The dollar at first strengthened against other major currencies on the news, hitting a fresh three-year high against the Australian dollar. Then, the greenback eased, as currency traders homed in on aspects of the Fed statement they perceived as dovish. Recently, the WSJ Dollar Index was flat on the day.

"There's still money being pumped into the economy," said Bill Baruch, a market strategist with brokerage iiTrader. "It's $10 billion, when they're still buying $75 billion each month."
Meanwhile, European stocks were broadly higher, with the Stoxx Europe 600 index up 0.9%. Germany's DAX added 1.1% amid further signs of strength for Europe's largest economy. The Ifo institute's business-confidence index climbed to 109.5 from 109.3 in November, hitting its highest level since April 2012 and matching economists' forecasts.

The U.K.'s FTSE 100 gained 0.1%, after a decline in U.K. unemployment to 7.4% in the three months to October–its lowest level in 4½ years. Economists had forecast a rate of 7.6%.

Asian markets provided a positive backdrop, as strong Japanese export data spurred a 2% gain for Tokyo's Nikkei index. The yen's decline against the dollar came amid speculation that Prime Minister Shinzo Abe might make a growth-strategy announcement in a speech Thursday.
Hong Kong's Hang Seng Index rose 0.3%, while the Shanghai Composite lost 0.1%.

In corporate news, FedEx FDX +0.45% edged up despite reporting fiscal second-quarter profit that missed Wall Street forecasts. The shipping giant raised its full-year forecast for adjusted earnings, in part to account for recent share purchases.

VeriFone Systems PAY -7.20% fell after the card-payment system maker reported earnings late Tuesday that missed analyst estimates.

Ford Motor F -6.29% declined after it cut its 2014 profit expectations for its North American business. It also warned that its longer-term profit goal is at risk.

Heico HEI +2.81% gained after the aircraft-components maker beat analyst forecasts for its earnings and revenue, and gave an upbeat outlook for the new fiscal year.

http://online.wsj.com/news/articles/...65573835658150