An hour into trading, American International Group (AIG 1.88%) is already down 4%, after being down 0.74% over the weekend. Will last week's Fed-generated market landslide continue today, or will AIG and other financial stocks be able to start climbing out of the debris?
The freak-out continues
For those of you who may have been summiting Mt. Everest last week, or were perhaps binge-streaming 30 Rock, last Wednesday, Federal Reserve chairman Ben Bernanke announced that the central bank would begin tapering quantitative easing later this year if economic data remained encouraging.
The Fed's final round of quantitative easing was launched last September, and eventually involved the monthly purchase of $85 billion in bonds. To put it mildly, when investors heard the announcement they freaked out: not just in the U.S., and not just in the equity markets. Investors around the world lost their minds in the commodities and bond markets, as well.
Foolish bottom line
To answer the question posed above, no, it doesn't look like AIG and its financial peers are going to stop their slides today, let alone begin to start clambering back up. Frankly, it might be a while before they do much more than level off.
In his announcement last week, Bernanke didn't come out and say it, but it's entirely possible one of his purposes in announcing the potential beginning of quantitative easing was to let some air out of bubbles that may have been forming in the equity markets. Over the past few months, we've seen new high after new high reached on both the Dow Jones Industrial Average and the S&P 500, but what has that been based on? The economic data has been encouraging, but not that encouraging.
The possible answer to what's been driving the markets is excess liquidity, which the Fed has been pumping into the economy for the past four years, and even more so since last September. With interest rates at record lows, where might investors have been turning in the reach for yield? The stock market.
Over the past year, AIG has returned a staggering 42.64%. And with a price-to-earnings ratio of 27, the stock now trades at a premium. Hang on for some adjustment here. It might be rough going for a bit, but for investors in it for the long term -- the type of investing The Motley Fool counsels -- this could actually be a buying opportunity. AIG has come a long way since the crisis, and its fundamentals are sounder than ever. When everyone else is fearful, be greedy. Isn't that what Warren Buffet says?
