After staying in the green for much of the trading day, the major market indices seemingly fell off a cliff right around 2:00 PM EST. By the time the closing bell struck at 4:00 PM, the Dow and S&P 500 were down about 0.4%. What happened?
Wall Street’s ongoing obsession with the Federal Reserve System happened. Specifically, the Fed released the minutes to last month’s FOMC meeting, in which officials hinted that we could be nearing the end of the Fed’s massive bond buying program. It’s now possible that the Federal Reserve will announce tapering at the last scheduled meeting of the year on December 17 and 18.
As I’ve discussed earlier in this blog, the Fed’s easy money policies have been great news for Corporate America and Wall Street. For one, corporations are taking advantage of the situation and borrowing on the cheap bond market so they can aggressively buy their stock back. And the stock market’s higher dividend yields continue to entice fixed income investors away from bonds and into the stock market.
For this reason, the markets popped after the FOMC minutes were released in September and continued to climb after President Obama tapped dove Janet Yellen to succeed Ben Bernanke as Fed Chair. And that is why the markets closed down in the red today.
Now for the trillion-dollar question: Should we be worried?
In my opinion, no. When the Fed does eventually taper, I expect that it will tap lightly on the brakes since it has not fulfilled its unemployment mandate. As a refresher, the Fed policies aim to lower the national Unemployment Rate to 6.5%, but the rate has only fallen to 7.3%. So Ben Bernanke has stated that the Fed will likely keep the federal funds rate near zero even after asset purchases end in an effort to put downward pressure on the unemployment rate.
In any event, when the Fed begins to taper, it’s going to make some high-yield stocks more volatile. But that doesn’t mean that the entire stock market will suffer—there should be plenty of high-quality equities that will continue to benefit from the ongoing flight to quality. For the first time in a while, corporate profits are firming up across the board; adding what I consider to be the “missing ingredient” in the market.
The bottom line is that while the market has digested some of its gains today on the Fed minutes, I wouldn’t get caught up in the selling action. In fact, this may be a good opportunity to pick up premium stocks on the cheap. I expect the market will recover in short order and that the only thing investors will digest in the coming weeks are their Thanksgiving dinners.