NEW YORK, N.Y. -- The stunning stock rally of 2013 continued its torrid pace Wednesday with both the Standard & Poor's 500 index and Dow Jones industrials hitting fresh all-time highs after the Federal Reserve surprised investors and said it will continue its market-friendly bond-buying program.
In a statement following a two-day policy meeting, the Fed said it would continue to buy $85 billion per-month in long-term U.S. Treasuries and mortgage-backed bonds to "help make broader financial conditions more accommodative" to promote a stronger economic recovery. The market was expecting the Fed to start reducing its asset purchases by roughly $10 billion to $15 billion per month.
The move by the Fed caught Wall Street off guard, says Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank. "No taper was not priced in," says Davidson. "The market got a head fake." The thought of a longer period of "free money" resulted in the bullish market reaction, he adds.
Virtually every asset class moved higher on the news. Both the S&P 500 and Dow Jones industrial average, which were down prior to the Fed statement, hit record highs after the announcement. The tech-filled Nasdaq rose to a fresh 13-year high.
The surprise decision also caused a major bond market rally, causing the yield on the 10-year Treasury note to dip to 2.76%, down from 2.85% Tuesday. Gold also soared, rising more than $35 per ounce, or nearly 3%, to around $1,345 per ounce. Oil shot up too, with a barrel of crude jumping more than $2 per barrel to nearly $108 a barrel.
The S&P 500, a broad measure of the U.S. stock market, climbed above its record Aug. 2 closing high of 1,709.67. Heading into today's session, the large-company stock index was up 19.5% for the year and up almost 153% from its March 9, 2009, bear-market low.
Stocks have been climbing higher in recent weeks amid better economic data, fading fears of a imminent attack on Syria as well as investors coming to grips with the idea that the Fed will soon start to "taper" its $85 billion in monthly asset purchases. The Fed's so-called quantitative easing policy, or QE, which is designed to push borrowing costs down to boost economic growth, has been in place for more than four years and has been credited for fueling a boom in the stock market.
Wall Street was expecting the Fed to start dialing back on its asset purchases after the meeting but at a conservative pace, with initial cutbacks no more than $15 billion expected.
Markets were also reacting to the Fed's updated projections for economic growth and unemployment, which will offer clues as to when the central bank will start to officially tighten policy and hike short-term interest rates, which are currently targeted around 0%.
Wall Street was also expecting the Fed to adjust its "thresholds" related to its zero interest rate policy. The Fed, however, reiterated that it would not start to raise short-term rates until the unemployment rate, currently at 7.3%, drops to at least 6.5%.
How the stock market reacts to tapering in the days and weeks ahead will be instructive.
The past two market corrections, or drops of 10% or more, which occurred in 2011 and 2010 occurred after the Fed ended its first two rounds of bond buying. The market also suffered two so-called "taper tantrums" in June and August, when the S&P 500 fell 5.8% and 4.6%, respectively, after the Fed hinted strongly that it was getting ready to start dialing back on its current round of asset purchases.
On Tuesday, the Russell 2000, an index of small-company stocks, also hit a fresh record high, while the Nasdaq composite climbed to a fresh 13-year high. Heading into Wednesday's trading session the Dow Jones industrial average was just 129 points shy of its May 2 record high of 15,658.36.