When in May 2013, US Federal Reserve Chair Ben Bernanke announced reducing the pace of buying the treasuries, the market had plunged temporarily. It had, similarly, declined this year in September-October when the market was speculating a taper.
S&P 500 had declined by 6 percent after Bernanke's comments in 2013. When the speculation of a taper grew on the Street this year, the index again lost 5 percent.
But, the major indices on Wall Street had very soon staged a recovery. Stocks had risen to clock gains of 17 percent for the rest of the year. In 2021, the S&P 500 has risen over 7 percent from the lows of October, touching record highs in almost every session.
So considering this trend and market sentiment, there are more gains to come, potentially across all sectors and companies in the S&P 500, according to a CNBC report.
Interestingly, the stocks had risen not only sometime after Bernanke's announcement, but they had also continued rising even while Fed conducted tapering.
Experts believe the reason was investors were of the opinion that the economy was resilient enough to withstand the removal of liquidity.
"People make it sound like it was a near-bear market," Sam Stovall of CFRA Research told CNBC. "It was merely a pullback."
To be clear, a market pullback is defined as a 5-10 percent drop in an asset class from a recent high. The term is used for periods when drops are short-term and the uptrend continues. It is this period when analysts suggest buying on dips.
Recent background
The central bank in the US is trying to curb inflation while trying not to choke growth. If they hike interest rates, inflation could continue rising. And if they don't hike rates, they might end up decelerating the economy.
So while it is time to pull back the extraordinary measures, it is choosing to start with the asset-buying program and not interest rates. The Fed had lent support to the economy in March 2020 when the coronavirus outbreak had led to lockdowns. The support broadly included near-zero interest rates and buying spree of treasuries worth $120 billion a month.
While it has decided to keep the interest rates at rock bottom, for now; it has officially announced tapering the asset-buying program.
Last week, the Fed had announced dialling back its purchase of Treasuries to $15 billion. It aims to phase out the purchases by June 2022.
Following the announcement, the benchmarks on Wall Street notched fresh highs. The S&P 500 rose over 0.7 percent. And the yield on 10-year Treasuries surged to 1.577 percent from 1.546 percent a day ago, while prices fell.
The history kicks in
According to a report in CNBC, post-World War II, in 60 instances when markets experienced pullbacks, they continued rising in the next month by an average of 3.3 percent. In this case, the next month would be November. In fact, the data shows this rally can continue until January. As historically, stocks rise 8.4 percent over the next 100 calendar days post-recovery.
(Edited by : Thomas Abraham)
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