Why the Dow Dropped and Bond Yields Soared

Ah, to remember the heady days when Bernanke's off-the-cuff remarks set Wall Street ablaze and led the Dow Jones (INDEX: ^DJI  ) on another rally. Yes, if you remember back to those golden days, which were all but a week ago, Bernanke had hinted that "supportive policies" from the Fed would continue.

However, while Bernanke has long been more of an activist in his approach to stimulating the economy, it's also been known that other Fed presidents weren't sold on the idea of more stimulus. Minutes released today from the last Federal Market Open Committee, or FOMC, show a wide range of opinions and a distinct lack of consensus with Bernanke.

The long and short of the situation: There is no consensus among Fed presidents on easing, and additional stimulus won't be pumped into the system unless the economy unexpectedly falters. The Dow reacted by falling on the news and is currently down 0.07% in late trading. Contrarily, the yield on 10-year Treasury Notes (INDEX: ^TNX  ) soared immediately on release of the minutes.

The long-term picture
While markets in the United States might be dropping on the FOMC minutes, the bigger picture is that the Fed is going to take stimulating actions if the economy falters. Even with today's drop, the market has still been on an absolute tear recently, with the Nasdaq (INDEX: ^IXIC  ) posting its best first quarter since 1991. I wouldn't be overly concerned with today's FOMC minutes, and I point to the fact that while the market might cheer a longer timeframe of next-to-zero interest rates in the short-term, too loose of a policy would be bad for investors in the long term.

On the bond front, it has long been known that buying bonds at today's low yields to maturity is a dicey endeavor. If you're holding long-term bonds, which will drop in price if interest rates soar, then the Fed's minutes are definitely an ominous sign that there could be two ways for your investment to drop: an economic recovery or a lack of consensus in the Fed leading to less stimulus and holding down current rates.

One more idea for the road
Days like today when investors are fretting over a reading of Fed minutes can make you lose track of the long-term way to succeed in the stock market: buying the best-run companies that will thrive in the long run. Learn about the one stock the Fool's chief investment officer picked to crush the market in this free report: "The Motley Fool's Top Stock for 2012." Instant access is just a click away.

Eric Bleeker owns shares of no companies mentioned above. Make sure to follow his tech commentary on Twitter.

The Motley Fool owns shares of Microsoft, Apple, Google, Intel, and Oracle. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, Google, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1854500, ~/Articles/ArticleHandler.aspx, 4/20/2014 10:53:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement