Yellen Sends the Dow Higher, But the True Test For Stocks Lies Ahead

As expected, the new Fed chair appears ready to continue tapering quantitative easing, but that won't necessarily save the stock market.

Feb 11, 2014 at 11:00AM

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.

Investors have waited for new Federal Reserve Chairwoman Janet Yellen's congressional testimony for days, and they seem to like what they're hearing this morning. The Dow Jones Industrials (DJINDICES:^DJI) climbed nearly 80 points as of 11 a.m. EST as Yellen testified before a House panel, reassuring investors that she doesn't see the choppiness in markets around the world posing a big risk to U.S. economic growth. Reassuring investors that she would continue the approach of former Fed chief Ben Bernanke, Yellen signaled her focus on the labor market, noting that unemployment remains higher than the central bank thinks the economy can support.

Investors felt the impact of the testimony across the market, with 27 of the Dow's 30 stocks gaining ground following the beginning of Yellen's presentation. But looking specifically at the reaction of certain stocks within the blue-chip index, it's clear that the jury is still out on the Fed's policy going forward.

For instance, some financial stocks aren't up as much as the broader market, with American Express (NYSE:AXP), Goldman Sachs (NYSE:GS), and Visa (NYSE:V) all rising a quarter-percent or less on the day. American Express recently stressed the importance of small-business customers to its overall success, with shareholders hoping that it will reach out to merchants to resolve past disputes. Better relationships with merchant customers will help American Express benefit more from higher consumer spending as the economic recovery continues. It's therefore relying on Yellen's policies to keep consumer finances healthy in order to drive that spending. Visa is in much the same boat, with its revenue even more dependent on spending volume rather than credit quality.

Yet what Yellen's testimony suggests is an economic isolationism that isn't consistent with the global economy. Goldman Sachs and JPMorgan Chase (NYSE:JPM) both operate in the global financial marketplace, and under certain circumstances it would be helpful for the Fed to act even if the direct interests of the U.S. weren't at stake. With Yellen showing at least some reluctance to embrace that cooperative view, it'll be interesting to see whether the Fed hesitates at a key moment if concerns spread beyond small emerging markets to capture a larger part of the global economy.

The true test for the Dow will come not from the Federal Reserve but from the overall rate of economic growth worldwide. With so many Dow stocks relying on global growth, it's important not to overstate the Fed's importance in determining whether the stock market will rise or fall from here.

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Dan Caplinger owns warrants on JPMorgan Chase. The Motley Fool recommends American Express, Goldman Sachs, and Visa. The Motley Fool owns shares of JPMorgan Chase and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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