Positive Reaction To Fed Tapering Drives Stocks Sharply Higher - U.S. Commentary

(RTTNews) - Stocks moved sharply higher during trading on Wednesday, benefiting from a positive reaction to the Federal Reserve's decision to scale back its stimulus program. The strong gains on the day lifted the Dow and the S&P 500 to new record closing highs.

The major averages saw further upside going into the close, ending the session at their best levels of the day. The Dow soared 292.71 points or 1.8 percent to 16,167.97, the Nasdaq jumped 46.38 points or 1.2 percent to 4,070.06 and the S&P 500 surged up 29.65 points or 1.7 percent to 1,810.65.

The rally on Wall Street came on the heels of news that the Federal Reserve is reducing its asset purchase program by $10 billion per month beginning in January.

Traders seemed to react positively to the removal of the recent uncertainty regarding the timing of tapering as well as the Fed's optimistic remarks regarding the economy.

Following its two-day policy meeting, the Fed said it will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month and add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.

The central bank attributed the decision to the improvement in economic activity and labor market conditions seen since it began the stimulus program.

Looking ahead, the Fed said it will further reduce the pace of asset purchases at future meetings if incoming data supports its expectations regarding the labor market and inflation, although it noted that asset purchases are not on a preset course.

The Fed also said it will likely be appropriate to keep rates at near-zero well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the bank's 2 percent longer-run goal.

The vote in favor of tapering was 9 to 1, with Boston Fed President Eric Rosengren dissenting amid concerns that reducing the pace of asset purchases is premature until incoming data more clearly indicate that economic growth is likely to be sustained.

"Bottom line, we got today what we knew was coming with the modest offset of forward guidance also as expected," said Peter Boockvar, chief market analyst at the Lindsey Group.

He added, "Forward guidance though is only as good as one's crystal ball and therefore the pace of QE from here on out will determine where stocks go from here in 2014."

The news from the Fed largely overshadowed a report from the Commerce Department showing a substantial increase in housing starts in the month of November.

The report said housing starts surged up 22.7 percent to a seasonally adjusted annual rate of 1.091 million in November. With the sharp increase, housing starts rose to their highest level since February of 2008.

Sector News

After seeing early strength following the housing starts data, housing stocks accelerated to the upside after the Fed announcement. The Philadelphia Housing Sector Index surged up by 3.7 percent, reaching its best closing level in over six months.

Lennar (LEN) helped to lead the housing sector higher, jumping by 6.3 percent after reporting better than expected fourth quarter results.

Considerable strength also emerged among banking stocks, as reflected by the 2.5 percent gain posted by the Dow Jones Banks Index. Bank of America (BAC) and Northern Trust (NTRS) turned in two of the sector's best performances.

Biotechnology stocks also moved sharply higher on the day, driving the NYSE Arca Biotechnology Index up by 2.5 percent. Gilead Sciences (GILD) and Vertex Pharmaceuticals (VRTX) posted notable gains.

Most of the other major sectors also moved to the upside, with significant strength visible among healthcare, brokerage, and retail stocks.

However, gold stocks bucked the uptrend, as the price of the precious metal came under pressure in electronic trading following the Fed announcement.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. Japan's Nikkei 225 Index surged up by 2 percent, while China's Shanghai Composite Index edged down by 0.1 percent.

Meanwhile, the major European markets all moved to the upside on the day. While the U.K.'s FTSE 100 Index crept up by 0.1 percent, the French CAC 40 Index and the German DAX Index advanced by 1 percent and 1.1 percent, respectively.

In the bond market, treasuries saw considerable volatility following the Fed announcement before closing in the red. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 4.2 basis points to a three-month closing high of 2.885 percent.

Looking Ahead

While trading on Thursday may continue to be impacted by reaction to the Fed announcement, reports on weekly jobless claims, existing home sales, and Philadelphia-area manufacturing activity may also attract some attention.

On the earnings front, Oracle (ORCL) and Paychex (PAYX) are among the companies releasing their quarterly results after the close of today's trading.