Fed Finally Pulls Taper Trigger

Fourth Quarter 2013

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Summary: Uncertainty surrounding future Federal Reserve (Fed) bond buying finally faded during the fourth quarter. In December, the Fed announced it would begin reducing its monthly quantitative easing (QE) in January. The Fed also committed to keeping short-term interest rates near zero well beyond the point at which U.S. unemployment falls below 6.5%.

Whereas the prospect of Fed tapering sent the financial markets into a frenzy earlier in the year, the Fed's decision to finally begin scaling back its monthly bond buying program had a less-dramatic effect on the markets during the fourth quarter. With economic data generally improving throughout the quarter, most investors assumed the taper would happen sooner rather than later. Also, the relatively modest amount of tapering-from $85 billion a month to $75 billion-accompanied by forward guidance on interest rates, helped reassure investors that Fed stimulus would remain in play for the foreseeable future.

The measured approach the Fed indicated it would take gave the stock market confidence that the removal of Fed stimulus would be a slow-and data-dependent-process. The announcement also suggested the Fed thinks recent economic gains are sustainable-another positive sign for stocks. Overall, this backdrop helped the S&P 500® Index Link Opens New Window advance more than 10% during the fourth quarter, bringing the year-to-date gain for the broad measure of U.S. stock performance to 32%, its best annual return since 1997. Non-U.S. stocks also advanced during the quarter, led by strong gains in Europe, where an improving economy and continued central bank support helped drive stock prices higher. Emerging markets were positive overall, but weaker growth, inflation concerns in certain markets, and the Fed's tapering announcement weighed on returns.

Improving economic data in the U.S. and Europe and impending Fed tapering generally pushed global bond yields higher. Broad U.S. bond market returns were slightly negative. But investment-grade and high-yield corporate securities were notable outperformers, continuing to benefit from investor demand for yield. Non-U.S. bond returns were mixed but generally declined. Similar to U.S. performance trends, non-government bonds modestly outperformed government securities. A stronger U.S. dollar relative to most major currencies generally led to weaker non-U.S. bond returns for U.S.-based investors.

The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments' fund. This information is for educational purposes only and is not intended as investment advice.

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