Why the taper will be good for the stock market, according to history

The Fed is tapering, and unlike the central bank’s 2013 reduction in monthly purchases of Treasury bonds and mortgage-backed securities, the stock market took it in stride. Or did it? When then-Fed chair Ben Bernanke surprised the market in 2013 with an indication the Fed would end its bond buying, stocks declined by about just as much as the pullback that occurred earlier this fall in what had seemed like an unstoppable market already prepared for the Fed taper. And for all the memories of the “taper tantrum,” the market in 2013-2014 came back just as the market has come back now, making up the pullback loss in October and continuing onto new records this month for the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite.

What’s next for stocks? If the history of the taper, and the much longer 60-year history of market sentiment is the judge, there are more gains to come, potentially across all sectors, styles and sizes of equities in the S&P 500 and S&P Composite 1500 Index, according to CFRA Research data.

After Bernanke’s taper comments in May 2013, stocks dove by 5.8% in the next month — which in the technical definition of a market pullback, between 5% to 10%, is on the smaller side of the selling — and for the rest of that year, the market was up 17.5%.

“After a very minor pullback known as the ‘taper tantrum’ stocks took off,” said Sam Stovall, chief investment strategist at CFRA Research. “Above average market returns across all styles, sectors and up to 80% of all sub-industries.” 

That goes for not only the market rebound after the “tantrum” but the 10-month period that included the actual Fed tapering activity.

In the 10-month tapering period, from mid-December 2013 to the end of October 2014, the S&P 500 rose 11.5%, according to CFRA Research. The likely reasoning, Stovall says, is that investors concluded if the economy was strong enough to withstand the removal of supportive bond-buying activity, it was healthy enough to continue to expand on its own.

“Don’t take anyone else’s word. There was a tantrum, the S&P 500 fell less than 6% in that one-month period, but people make it sound as if there was a near-bear market,” Stovall said. “It ended up being barely a pullback.”

And that taper ticker tape is part of what leads Stovall to conclude that the 5.2% pullback in September of this year will end up being like so many market selloffs in the past — breakeven reached quickly, “and then history kicks in,” he said.

In 60 instances since World War II when stocks experienced a pullback, the market continued to rise in the next calendar month and did so by an average of 3.3% — and was higher 92% of time. In this case, that would be November (October was the “back to breakeven” month). So the hot start to this month should not be…