"In the next few months, we could take a step down in our pace of purchase," Ben Bernanke told a congressional committee at the end of last month. Sounds innocuous enough, but with those 16 words, the Federal Reserve chairman ignited a global repricing of assets.
First and foremost, stocks have been, and continue to be, hammered. After hitting an all-time intraday high of 15,542 on May 22, the Dow Jones Industrial Average (^DJI 0.46%) has fallen more than 800 points as of 3:20 p.m. EDT today. Following an overnight sell-off in Asia, the blue-chip index is down 89 points, or 0.6%, having bounced back from losses of more than 200 points earlier in the day.
Furthermore, with reduced inflation expectations come lower gold prices. Since last October, the precious metal and inflation hedge has lost nearly a third of its value, dropping from about $1,800 an ounce down to about $1,300 an ounce today. Unsurprisingly, the world's largest gold exchange-traded fund, SPDR Gold Shares (GLD 1.05%), has followed suit, declining by 22% over the past six months alone.
Gold Price in US Dollars data by YCharts.
And finally, the yield on the 10-year Treasury has shot up -- meaning that the underlying bond prices have declined. Nearly a year ago, the benchmark security yielded less than 1.5%. Today, it's yielding more than 2.6%. It follows, then, that the prices of ETFs holding longer-duration Treasuries have responded in kind. Among others, the iShares Barclays 7-10 Year Treasury (IEF 0.09%) is off by 6.9% since the beginning of May. And on the other side of the equation, funds that are short government bonds like the ProShares UltraShort 20+ Year Treasury (TBT -0.52%) are in the midst of an impressive rally.
What does this mean for the individual investor? I think it's safe to say that there will be increased volatility in all asset classes over the foreseeable future as speculators continue to, well, speculate abuot the likely direction of monetary policy going forward. So if the volatility bothers you, then stop checking your brokerage account for a while. But if it doesn't, then watching how everything plays out could serve as a valuable and entertaining opportunity to learn. As Warren Buffett has said in the past, "QE is like watching a good movie, because I don't know how it will end."
