Will Stocks Surge or Sink Following the Fed Announcement?

The Dow Jones Industrial Average (INDEX: ^DJI  ) and other major U.S. indexes booked solid gains yesterday in anticipation of today's 12:30 p.m. EDT statement from the Federal Open Market Committee. The gains reflect optimism over a monetary policy statement which is expected to range from, at a minimum, dovish commentary on rates to, at its extreme, the implementation of a brand-new quantitative easing program.

What to expect
According to a recent Wall Street Journal poll, the expected scenario is a continuation of the Fed's Operation Twist -- a program that involves the simultaneous selling of short term T-bills and purchasing of longer-term bonds -- with the goal of lowering long-term interest rates. While this is the expected scenario, investors should be aware of the possibility the Fed does nothing at all -- an outcome that would likely pressure the broader market this afternoon. However, given the recent disappointing economic data at home and the continued strife in Europe, I would be shocked by complete inaction from the committee. Of course, with interest rates already hovering near record lows, the incremental impact from each new stimulus program could be diminishing.

Whatever the Fed's move is, expect the financial and materials sectors to remain the biggest movers today. Yesterday the sectors returned 1.7% and 2%, respectively, outpacing the broader 1% return for the S&P 500 (INDEX: ^GSPC  ) . That means it's likely to be another big day for the likes Bank of America (NYSE: BAC  ) , which rose 4.5% to lead all Dow components yesterday. Among materials stocks, aluminum giant Alcoa (NYSE: AA  ) was up 2.4% on the day yesterday, while United States Steel (NYSE: X  ) led the sector with a 9.5% gain.

Forget the Fed with these stocks
Like the famous Master's golf tournament, which doesn't truly begin until the "back nine on Sunday," don't expect the market to show its true colors until the back half of the trading day, after the Fed statement.

Fortunately, the long-term investor can feel comfortable any day of the week with the Dow companies outlined in our newest free report: "The 3 Dow Stocks Dividend Investors Need." These are the companies that gather dust in investor portfolios -- the kinds of blue chips with a one-two punch of solid dividend and highly sustainable business models built for the long term. Claim your free copy today before this special free report is gone by clicking here now!

Brenton Flynn doesn't own shares of the companies mentioned. The Motley Fool owns shares of Bank of America. 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.


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