Major Asset Class Returns Since the Fed’s Taper Announcement

by on February 19, 2014 | ETFs Mentioned:

When the Federal Reserve first dropped the hint last year at the end of May that it intends to start reducing the pace of its monthly bond-repurchases, major equity indexes, especially those in emerging markets, dropped like hot potatoes. The mere thought of the “free money era” dwindling to an end was enough to spark what many called the “taper tantrum”, which was largely a fear-induced sell-off predicated on the misconception that a rate hike was around the corner  [see The Fed Effect: How Monetary Policy Impacts Your ETFs].

The dust settled as 2013 neared an end and U.S. equity indexes flirted with all-time highs, only to give way to another round of steep selling pressures following the Fed’s official announcement in mid-December that it would in fact start tapering in 2014. Despite having six months (first taper hint came on 5/22/2013) to digest the real motivation behind the Fed’s decision to taper, which is an improving U.S. economy, investors went through another taper-tantrum following the official bond-repurchases announcement on December 18th, 2013 [see also January Review: Best and Worst Performing ETFs].

Post-Taper Announcement Performance Review

Below we recap the performance of five major asset classes spanning from 12/18/2013 (taper announcement) through 2/11/2014 using adjusted daily closing prices:

  • U.S. Stocks represented by SPDR S&P 500 (SPY, A)
  • Developed Markets represented by MSCI EAFE ETF (EFA, A)
  • Emerging Markets represented by MSCI Emerging Markets ETF (EEM, A-)
  • Long-Term Treasuries represented by 20+ Year Treasury Bond ETF (TLT, B)
  • Gold represented by SPDR Gold Trust (GLD, A-)

Right off the bat, it’s interesting to see how U.S. and Developed markets reacted positively following the taper announcement; gold and Treasuries on the other hand were quite weak the days following the announcement, although they managed to come out on top following Wall Street’s downturn in January. The rebound seen at the start of February hasn’t been enough to bring back Emerging Markets, most likely because this asset class remains plagued with uncertainties that go beyond fears of rising rates, including: slow growth in China along with handfuls of fiscal and political instability in Thailand and Turkey [see 3 Emerging Markets Not Dependent on China].

The Bottom Line

In the short-term, rising volatility levels have made it difficult to decipher which asset classes have been punished perhaps more than they deserve. When the dust finally settles, we would anticipate for developed stock markets to resume their strong uptrends, while emerging markets as a whole will likely remain choppy as investors continue to digest uncertainty from overseas. As such, in lieu of utilizing broad-based funds such as EEM, we would instead advise looking to country-specific ETFs for those who wish to favorably position themselves in anticipation of a rebound across the developing world.

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Disclosure: No positions at time of writing.