Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
The Dow Jones Industrial Average (DJINDICES: ^DJI ) was up 190 points, to 15,992, as of 1:30 p.m. EST, as new Federal Reserve Chairwoman Janet Yellen testified before Congress that she strongly supports the central bank's current monetary policy strategy. All but one of the 30 Dow stocks were up, leaving Cisco as the only loser in early afternoon. The S&P 500 (SNPINDEX: ^GSPC ) was up 18 points to 1,818.
Yellen started her Capitol Hill testimony on monetary policy by saying, "Let me emphasize that I expect a great deal of continuity in the [Federal Open Market Committee's] approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability." The rest of Yellen's prepared remarks reinforced many investors' belief that she is a dove on economic policy.
In statements in the past year, Fed members have stated they believe that the economy-stimulating asset purchases and low federal funds rate are appropriate as long as the U.S unemployment rate is above 6.5%. Yellen's prepared remarks stressed that while unemployment has fallen to 6.6%, that number doesn't tell the whole story -- many people are underemployed, working in part-time jobs when they want full-time work, or working in jobs that are below their level of qualification. She also noted the large problem of the long-term unemployed, those out of work for more than six months.
This reinforces expectations that Yellen will keep the Fed policy as is for some time even as the unemployment rate continues to drop. This is in line with the Fed's statement "that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent."
So what can an investor do in times like this? The stock market is overvalued, and earnings look cyclically high. That said, predicting where the broad market will go in the short term is a game for fools (with a lowercase "F"). Stocks can always get more overvalued. When things get frothy, it's worthwhile to build up some cash on the side for when prices inevitably fall.
The Motley Fool has always taught that Foolish (capital "F") investors don't invest in the broad market. We invest in great companies at good prices, continue to educate ourselves, and hold on to our great companies over the long term. The market will fluctuate (sometimes massively), but great companies will win out over the long run.
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