Adam Shell

USA TODAY

As Fed readies for two-day meeting%2C Wall Street mourns withdrawal of stimulus

Latest stock market downdraft coincides with start of Fed %22tapering%22

Volatility related to Fed policy change expected to continue in 2014

Are the Federal Reserve's fingerprints on Wall Street's latest 911 call?

If there's been a traceable pattern to the U.S. stock market's biggest dips in recent years, including the latest swoon driven by turbulence in emerging markets, it is this: Sell-offs have coincided with periods when the Federal Reserve was ending or pulling back on its market-friendly stimulus programs.

Ever since the Fed began its unprecedented bond-buying program in late 2008, stocks have tended to go up when the central bank has been in the market supporting asset prices. In contrast, stocks have declined whenever the Fed has been out of the market or cutting back on its asset purchases.

The Standard & Poor's 500-stock index, which dipped 0.5% Monday on the heels of its worst weekly drop since June 2012, has rallied 24% or more during each of the Fed's three quantitative easing programs, known as QE, Bespoke Investment Group says. In contrast, whenever the Fed has been out of the market, or reducing its bond purchases, the market has faltered. The S&P 500 fell 9% after the end of QE1 in spring 2010, dipped 14.5% when QE2 ended in the summer of 2011 and suffered two drops of around 5% last year in so-called "Taper Tantrums" after the Fed began hinting at ending QE.

That's relevant now as the Fed kicks off a two-day meeting Tuesday at which investors, despite the market's recent rocky patch, expect the central bank to announce that it will further trim its monthly bond purchases, a process known as "tapering" that began earlier this month.

It's not fair to pin all the market's recent troubles on Fed policy. But it's hard to deny that the shift toward less stimulus hasn't acted as a disruptive force, given that investors have become so addicted to the central bank's easy-money policies over the past few years.

The recent pullback can be blamed on a confluence of factors — including a U.S. stock market that was due for a pullback after a 30% gain last year; lackluster profit reports from U.S. companies; China fears related to slowing growth and its shadow banking system; and the knock-on effects of plunging currencies in some developing countries. Still, the shift in Fed policy has no doubt added to the volatility.

"The big worry related to the Fed is that now that the taper has begun, are U.S. stocks in store for a repeat of what happened the last two times the Fed tried to exit from one of its QE programs," Paul Hickey, co-founder of Bespoke Investment Group, wrote in a client report.

Gina Martin Adams, institutional equity strategist at Wells Fargo Securities, expects Fed-related market volatility to persist in 2014. It's also likely to continue to hamper vulnerable emerging markets, which bears watching, she adds,

"Each time the Fed has attempted to ease off the gas pedal over the last five years, markets have sputtered, and we expect much the same in 2014," she told clients. "With the Fed meeting this week, the announcement about the pace of future tapering will likely heavily determine investor appetite to buy this dip, or keep selling."



