by Jiang Hanlu, Liu Fan
NEW YORK, Dec. 18 (Xinhua) -- U.S. stocks surged Wednesday, lifting the Dow Jones Industrial Average and the S&P 500 to new record closing highs, after the Federal Reserve announced a modest reduction in its monetary stimulus on the back of a stronger economic recovery
With the initial tapering finally coming, analysts believe major stock indices will end around current levels by the end of 2013 and expect modest gains in 2014.
MARKET RALLY NO SURPRISE
Following a two-day policy meeting, the Fed said Wednesday it would reduce the pace of its monthly massive bond purchases, the third round of quantitative easing program, by 10 billion U.S. dollars each month starting January.
The market saw a brief selloff immediately after the Fed's announcement, then turned on a dime and rebounded very strongly as more details started to filter through the market, which enabled investors to get a better understanding about the tapering decision.
The Dow Jones Industrial Average skyrocketed 292.71 points, or 1.84 percent, to 16,167.97. The S&P 500 rallied 29.65 points, or 1.66 percent, to 1,810.65. The Nasdaq Composite Index leapt 46.38 points, or 1.15 percent, to 4070.06.
"I'm not surprised (by the decision) at all," said Kenneth Polcari, director of NYSE Floor Operations at O'Neil Securities. Fed officials have been talking about this for weeks, as well as the differences between tapering and tightening, he added.
Polcari said the amount of tapering announced by the Fed met investors' forecast of a 10-to-15-billion-dollar cut.
Moreover, the Fed pledged to maintain the current target range for the federal funds rate at near-zero well past the time that the unemployment rate declined to below 6.5 percent, especially if projected inflation continued to run below the Fed's 2-percent longer-run goal, according to a statement released by the Fed after the meeting.
"It seems that the market wants to hear that. With rates staying low for so long, that will be good for housing and risk assets," Polcari said.
The strong rally reflected that "the Fed feels confident that the economy is strong enough to at least initiate a beginning of a tapering. That's a very positive sign," Warren Meyers, director at Illustro Trading, told Xinhua Wednesday.
Moreover, the market embraced the central bank's forecast that the U.S. economy and the labor market will continue to improve.
The Fed expected the gross domestic product (GDP) of the United States to advance between 2.8 percent to 3.2 percent next year, versus September's forecast of GDP growth at 2.9 percent to 3.1 percent.
The unemployment rate is now expected to average between 6.3 percent and 6.6 percent by the end of 2014, compared with an earlier range of 6.4 percent and 6.8 percent.
Fed Chairman Ben Bernanke told a press conference following the meeting that further adjustments on bond purchases would be dependent on incoming information and similar moderate tapering steps were expected throughout 2014.
"I think they would love to end this bond buying by the end of 2014," Meyers said. "The first half of 2013 is really going to be the determining factor to see if they can be on that target data or not ... then I can see they speed it (tapering) up through the end of the year."
STOCKS TO GAIN 8 TO 12 PCT IN 2014
Having cleared a string of hurdles this year, including the Washington fiscal drama, tapering fears and Middle East turmoils, U.S. stocks has staged a massive rally year to date, with the blue-chip Dow up 23.4 percent, the S&P 500 up 27.0 percent and the tech-heavy Nasdaq up an outstanding 34.8 percent.
Traders predicted U.S. stocks will maintain their 20-plus gains for the remainder of this year and are going to end up somewhere around the current levels.
On the highly anticipated "Santa Claus rally," which is the seasonally bullish period of a year between Thanksgiving and Christmas, Meyers noted that "we may not get the Santa Claus rally this year."
Before the Fed cleared uncertainties around its possible tapering, U.S. stocks were under pressure in the first two weeks of December, as investors traded cautiously to lock in gains.
But Meyers said a New Year's rally would be possible as portfolio managers will have the full year to trade off their new positions, while now they have to finish the books by the end of this year with only a few short days to trade around.
Polcari said 2014 would not replicate the massive gains this year, nor would the market have a big correction.
He said a gain anywhere from 8 percent to 12 percent in the S&P 500 next year "is probably a fair assessment."
Headwinds next year were going to come from both the political and economic sides, including the congressional mid-term elections, presidential elections and housing demand, Polcari noted.
For the past four years, the market was driven by Fed stimulus, Polcari said. The markets had to get to a point where they were not manipulated by the central bank and started assessing prices based on what the fundamentals are in the country, he added.
With economies around the world starting to stabilize, Polcari said he believed 2014 would be a year of transition, as the Fed would ultimately exit this stimulus program and allow the economy to function on its own once again.
Being the first to go into the recession and the first to come out of it, the United States "will still be the leader through next year of the equity markets, pulling Europe along with them," Meyers said.