The Federal Reserve's decision to stay the course on economic stimulus has ignited speculation that some beaten-up assets could be set to rebound through the end of the year.
The reason: In holding off on any move to cut back its monthly bond-buying program, known as quantitative easing or QE, the Fed has signalled that it could be on the sidelines for some time.
"This raises the possibility that the Fed is back in QE-forever mode," Ed Yardeni, president of Yardeni Research, said in a note. "It certainly reduces the likelihood that QE will be terminated by mid-2014."
That is potentially great news for dividend stocks, real estate investment trusts, home builders and emerging markets – the sectors that have struggled since the Fed outlined earlier this year its intention to wind down QE. September had been pegged as the most likely starting point for the stimulus taper.
Rate-sensitive sectors were among the top-performers in Wednesday's rally, when the S&P 500 hit a record high, along with big moves by bonds and gold, suggesting that the laggards in the runup to the Fed announcement are now set to lead.
The rally stalled on Thursday, as the S&P 500 slipped 0.2 per cent to 1,722.34; the S&P 500 Homebuilders index fell 2 per cent.
However, the Fed's decision may have profound implications on the market over the next few months if it signals that the central bank does not believe the U.S. economy is strong enough to withstand the recent rise in bond yields.
The yield on the 10-year U.S. Treasury bond rose to a high of 3 per cent earlier this month, up from just 1.63 per cent in May, raising concerns that higher rates could slow consumer spending and hobble the recovering housing market.
The Fed's decision not to taper "was certainly a vote of no confidence in the ability of the economy to handle the backup in bond yields," Mr. Yardeni said.
Michael Hartnett, chief investment strategist at Bank of America, believes that the Fed's decision to delay any stimulus tapering is not just a one-month event. He doesn't see tapering beginning until bond yields rise along with mortgage applications, which is something that hasn't happened yet.
"The summer reversal in housing activity was a likely signal to the Fed that the macro [environment] is still too fragile to withstand even a small tapering," he said in a note.
"We believe tightening is unlikely to happen until higher bond yields, bank stocks, housing activity and corporate 'animal spirits' all signal in unison that policy has traction."
With so many moving parts, it doesn't sound likely that QE is set to wind down any time soon.
Indeed, Mr. Hartnett believes that Wednesday's big winners – or what he calls "tapering victims" – will see gains continue through the fourth quarter as they reverse their summer losses.
At Pavilion Global Markets, where they had rightly called Wednesday's no-tapering decision, strategists argued that one line in the Fed's new policy statement – "asset purchases are not on a preset course" and that policy decisions would be based on incoming data – is a critical element to forthcoming policy because it appears to give the central bank considerable flexibility in the months ahead.
As a result, they believe a tapering announcement could be made in December, but accept that the delay could extend into 2014. Either way, they argue that financial markets will continue to function within what they call a "pretapering air pocket."
But that's not such a bad thing: They believe that in holding off its tapering decision, the Fed has given the current rally a second wind.
"We are aware the fiscal agenda could bring volatility over the next few weeks, but overall the current pretapering environment provides substantial upside to global equities," Pavilion strategists said in a note.
In particular, the losers are set to win.
David Berman