The stock market puzzled investors repeatedly throughout March. Issues that have affected stock prices include concern over employment numbers, the impact of severe weather on specific industry sectors, political upheaval overseas, and reactions to the Federal Reserve’s intention to begin dialing down its stimulus program. As its new head, Federal Reserve Chairperson Janet Yellen experienced for the first time how the media seek insight by picking apart remarks made by the Fed’s Chairman, and how any hint of surprise culminates in a knee-jerk reaction on Wall Street.
The Fed’s Tapering-Off program
Speaking at her first news conference following a meeting of the Fed Open Market Committee (FOMC) – the group that oversees the Fed’s monthly bond buying program – Yellen said that interest rate increases would begin six months after the Fed’s stimulus (bond buying) program concludes. If the program finishes in the fourth quarter of 2014, a rate hike would happen sometime in the spring of 2015. Following her remarks, the stock market took a dive, accompanied by a corresponding surge in bond yields. Although some of her colleagues were surprised by this reaction, many traders thought otherwise.
Anxiety and Calm
The Fed’s decision to reduce its monthly asset purchase program by $10 billion to $55 billion – its “tapering off” program – was anticipated and created no stir among traders. The major issue for analysts was the interpretation of the “extended period of time” that would pass before the Fed raised interest rates. Many stock market analysts assume this means interest rate hikes sooner than they had expected. The Dow Jones Industrial Average dropped more than 200 points in initial reaction to Yellen’s remarks, but rebounded to reach new highs later in the week. Bond yields steadied, too, as the week played out. The FOMC also fed anxieties by amending language in a previous plan to hike rates when the unemployment rate declined to 6.5 percent. The revised language gives the Fed more leeway in deciding when to increase interest rates regardless of jobless statistics.
As the dust settled, many analysts defended Yellen, noting that the Fed’s Chairman was right to begin preparing the market for policy changes that will happen if economic growth continues. On the other hand, of course, there were also vocal critics who believe the tapering-off effort is moving too slowly and that by delaying interest rate hikes too long, the Fed risks creating a market bubble.
Whatever they think about Yellen’s first FOMC statement, most market experts agree that there will be changes ahead in the bond market. Traders foresee opportunities in longer-dated and high-grade bonds. Market commentators noted that individual investors have been directing money back into mutual funds and exchange-traded funds over the past six to seven weeks. As always, experienced Wall Street commentators urge individual investors to avoid knee-jerk decisions or major revisions to their portfolio based on market gyrations.
The comments above are intended as general commentary. Contact your investment advisor and tax professional for guidance on your investment strategy.