Wall Street Got It Wrong -- but You Don't Have To

If you're in the macro know, there's no beating around the bush: Federal Reserve Chairman Ben Bernanke's statements this week were major market movers. But as the Dow dipped and the S&P shuddered, long-term investors have a huge reason to celebrate. Here's why.

Bernanke's big mouth
Analysts couldn't care less about financial forecasts and official press releases. When it came to this week's Federal Reserve statements, every eye was on Bernanke's Q&A session. Here, the man behind the money would be forced to leave his script and give off-the-cuff remarks to potentially revealing questions.

Did Ben burst into tears? Did he hint that his heyday was over? Did he recommend Bitcoins? Hardly. But he did make mention of a potential end: "In the next few meetings, we could take a step down in our pace of purchases" of mortgage-backed securities and long-term Treasuries.

That statement was enough to send bears roaring to the market. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) dropped 1.35%, while the S&P 500 (SNPINDEX: ^GSPC  ) slumped 1.39% by the end of the day.

Source: Wikimedia Commons. 

But in his hurry to readjust, Mr. Market may have lost its long-term focus. An equally important statement, and one that received little financial fanfare, went a little something like this:

To support continued progress toward maximum employment and price stability, the [Federal Open Market Committee] expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.

Buybacks or not, the Fed is in it to win it and will keep its monetary policy in place as long as it takes for our economy to legitimately pull itself out of its recession rut. And while Mr. Market might've ignored this news, it creates a unique investing opportunity for long-term investors.

Take a walk down market memory lane
The last time the U.S. unemployment rate dropped from 7.6% (our current rate) to 6.5% (the Fed's point of retreat) was between September 1992 and December 1993. In that 15-month period, the Dow Jones increased 14.9%, the S&P 500 soared 16.4%, and Michael Jordan scored his 20,000th career point. Not a bad year for positive numbers. But some of our most beloved blue chips headed even higher.

As retail sales rose 9.8%, McDonald's (NYSE: MCD  ) shares jumped 35%. As the Purchasing Managers Index increased 11.9%, General Electric (NYSE: GE  ) shares grew 41% while Intel (NASDAQ: INTC  ) rocketed 110% on 42% sales increases.

MCD Chart

MCD data by YCharts

What happened in 1992 and 1993 was no financial fluke. Unemployment rates are a crucial economic indicator, and the Federal Reserve's recent statements underline that fact. As short-term Wall Street investors pocketed their profits and walked away from Wednesday's market, long-term investors know there's a lot more in store.

Learning from our past
Past markets are no predictor for future movements, but in this case, a 20-year-old history lesson helps put things in perspective. The Federal Reserve may back off on buybacks, and that will undoubtedly hurt the market. But Ben's only going to pull the plug if the markets are well on their way to making returns magnitudes higher than any one-day drop. And when that happens, long-term investors will sit back and enjoy the slight slump on their double- or triple-digit profits.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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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.

  • Report this Comment On June 22, 2013, at 8:30 PM, ChrisMcPhail wrote:

    A basic truth is that we may only loan what we have. If we have a dollar, we may loan a dollar. Yet, under the fraud of fractional reserve banking, banks loan more than ten times the money they actually have.

    Fractional reserve banking is a ponzi scheme whereby banks create money out of thin air through fraudulent book keeping, loaning non-existent money out at interest. It is no different than counterfeiting. In collusion, fractional reserve banks counterfeit more than 10 times the amount of money that they actually have deposited, and charge interest on it all. Since money represents labor, fractional reserve bankers are effectively robbing the value of everyone's labor through this fraudulent scam.

    "If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered." - Thomas Jefferson

  • Report this Comment On June 23, 2013, at 12:26 AM, HijodeMiPadre wrote:

    Let us also remember, while we are recollecting, that at that time the economy was not about to saddled with the largest ever implementation of government spending since the New Deal, nor was the percentage of national debt to gross domestic product at current levels. Let us also remember for the reason that the Fed is proping up this market in the first place, which is that the SEC, through lack of over-sight, and Congress, through mistaken policies, encouraged the market implotion of 2008-2009. The same implotion from which we are still 'recovering'. What does one have to do with the other? We are to trust that the same 'great thinkers' who devised this mess are going to have a miracle solution to get us out of it? To aid to the problem, policy makers in Congress continue to stifle business, production and innovation through poor policy decisions(i.e. immigration legislation, expanding corporate welfare through the Farm Aid bill) Does anyone have a scenario where the artificial market stimulated by Fed money does not come crashing down to say 10,000 once it is starved? Or, does it become to big, to important to fail and they just keep pumping money in until the dollar is worthless?

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