The Fed moves and GE reassure investors

The Fed moved to taper last night cutting the bond purchase program by $10bn a month, starting in January. The reaction of equity markets was to rally sharply on the news, the S&P 500 rose over 1.5% and the FTSE 100 by a similar amount. Investors would have been encouraged by the muted reaction from the bond market as US treasury yields rose, but only modestly. The accompanying comments were to be expected, the ongoing bond purchase program would depend on the strength of the US economy. The rally on the news was not surprising as traders will look to gain exposure into the year end, hoping that now the uncertainty of what the Fed was going to do is out of the way, markets will be free to rally again. The VIX fell sharply, as I assume those who took out protection ahead of the announcement looked to sell that protection. Markets do not tend to trade well in times of uncertainty and when that uncertainty is removed it often leads to a rally, last night was a good example of this. There was also probably some relief amongst investors that the initial taper is pretty modest. Equity investors will continue to look to the bond markets for direction, as a sharp rise in bond yields could undermine equity markets again.

The other event yesterday I highlighted was the General Electric investor and analyst meeting. The comments from the CEO appeared to confirm what most people expect to see from economies and corporations in the year ahead. Analyst forecasts for GE is revenue growth of 6% for next year, at yesterday's meeting the CEO, Jeff Immelt, suggested revenue growth slightly below that of 4-7%, as I imagine he wants to keep analyst expectations subdued looking to meet or possibly beat those expectations. Reassuring comments for investors came as Mr Immelt talked about the "ton of cash" (over$90bn) that he should have at has at his disposal to distribute back to shareholders in the coming years. Many market commentator's worry that a lot of the recovery in earnings has come from margin expansion, and that this is expansion unsustainable, last night Mr Immelt also reassured investors that GE can maintain their margins. On the US economy he talked about a recovery, Europe he described as sluggish, he comments on China were positive and still that it offers great opportunities. The shares rallied about 1.5% after the meeting.

Last night's comments from GE could easily have come from many large corporations. Shareholders continue look to CEOs to focus on returning excess cash, and will reward those who do. CEOs will look to maintain margins through efficiency gains, and keep analyst expectations under control, making it easier to meet those expectations in times of uncertain economic growth. If economies do continue to show signs of recovery, interest rates remain at historic low levels and corporations do increase cash returns to shareholders that should give a reasonable back drop for equity markets in 2014.

Posted on December 19, 2013 .