On May 22, 2013, then Federal Reserve (Fed) Chairman Ben Bernanke surprised investors during testimony to Congress by announcing the Fed was considering tapering its monthly asset purchases and normalizing interest rates in the coming months. Within a month of Chairman Bernanke’s announcement, the S&P 500® declined 4.4% and the 10-year U.S. Treasury jumped more than 50 basis points (bps). Clearly markets were caught off guard by the Chairman’s comments; that moment has been known as the “taper tantrum” ever since.
As a result of the tantrum, investors have come to view “taper talk” with a negative connotation. A common narrative is that unconventional monetary policy accommodation, also known as quantitative easing (QE), drives asset prices higher and interest rates lower, so investors tend to be cautious about scaling back monetary stimulus. As such, the phrase “tapering is tightening” also emerged from this period, reflecting concerns that the removal of QE would lead to tightening financial conditions.
But what happened during the actual 2013-2014 tapering period? Markets did not careen into a massive selloff, and the economy did not double-dip into a recession, so why is there still a sense of foreboding? While investing is driven by a mosaic of events, we believe the historical narrative typically gets condensed into one or two bite-sized messages, and the taper tantrum is no exception. The facts left out of this narrative are that equity markets soon recovered from the knee-jerk reaction and bond markets were mixed.
Today, we face a similar scenario, as the Fed has hinted at plans to taper its latest QE program “soon,” which was swiftly enacted during the COVID-19-induced market selloff. Given the taper tantrum soundbite is still somewhat fresh in many investors’ minds, our aim with this publication is to dispel the notion that tapering is equivalent to a market pullback. We believe markets are far too dynamic to be wholly influenced by any one participant, even the Fed! We tackle the topic several ways, looking at a comparison of financial conditions, as well as fixed income and equity markets. If there is one message we want to make clear, it is this: Don’t fear the taper.