After swooning earlier this month, US stocks soared this week, powering to new records after the US Federal Reserve announced plans to scale back its stimulus program.
The biggest portion of the week’s gains came on Wednesday, just after the Fed’s announcement it will trim US$10 billion in monthly asset purchases to US$75 billion starting next month. US stocks advanced again on Friday following a surprising upgrade to US economic growth in the third quarter.
At Friday’s close, the Dow Jones Industrial Average rose a staggering 465.82 (2.96 percent) for the week to close at 16,221.14 and set a new record. The broad-market S&P 500 finished up 43.0 (2.42 percent) at 1,818.32 — also a new record — while the tech-rich NASDAQ Composite Index rose 103.76 (2.59 percent) to 4,104.74.
The markets gave the thumbs-up to Fed Chairman Ben Benanke’s handling of the long-discussed taper to the stimulus, which is viewed as a workable strategy for ultimately ending the bond-buying program.
“The Fed threaded the proverbial needle,” BTIG chief global strategist Dan Greenhaus said after the Fed’s announcement.
Alan Skrainka, chief investment officer at Cornerstone Wealth Management, said Bernanke pivoted after the markets reacted “very violently” to talk of tapering earlier this year.
“That taught him an important lesson: ‘I can take something away from the markets, but I need to give something back,’” Skrainka said.
The Fed paired its decision to begin tapering with a pledge to maintain near-zero interest rates for longer, likely until “well past the time the unemployment rate declines below 6.5 percent.”
Such a move is “overwhelmingly positive” for the still-recovering US economy, but one risk is that the strategy is tailored for a slow-growth economy, Skrainka said. The Fed could need to adjust its strategy if the pace of recovery accelerates and inflation becomes a concern, he added.
However, Skrainka and others do not expect such a scenario.
“We’re still in this modest-growth, modest-inflation economy,” Wells Fargo Advisors senior equity strategist Scott Wren said. “The market is a little ahead of itself.”
Corporate news highlights this week included Dow component Boeing Co’s plan for a US$10 billion share buyback and a 50 percent dividend hike.
The aerospace giant followed that up with a spate of executive promotions, including tapping defense division chief Dennis Muilenburg to serve as president and presumed chief executive to-be.
Information technology giant Oracle Corp also had a big week, posting major gains after earnings bested expectations and executives expressed confidence about its cloud computing business.
On Friday, it said it was acquiring cloud software company Responsys for US$1.5 billion.
On the downside, Target Corp rattled the market and countless shoppers when it disclosed that a data breach to its payment system had affected about 40 million customers. Among the data stolen were credit card numbers, security codes and expiration dates.
Ford Motor Co also had a bad week after projecting lower profits for next year and signaling that its medium-term profit margin forecast was at risk due to weak conditions in Europe and South America, especially Venezuela.
Trading volume next week is expected to be light, with many money managers on vacation due to the Christmas holiday, which will close markets on Wednesday and Tuesday afternoon.