Although we don't believe in timing the stock 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.
For the third day in a row, the Dow Jones Industrial Average (DJINDICES:^DJI) is losing value as investors continue to worry that the Federal Reserve will soon rein in its asset purchases. As of 1:25 p.m. EDT the Dow is down 52 points, or 0.33%, to 15,467, while the S&P 500 (SNPINDEX:^GSPC) is down 0.39% to 1,691.
Today stock markets around the world have dropped. In Asia, the Nikkei 225 lost 4% as a result of a strengthening yen, which hurts exporters, and concern about the end of the Fed's accommodative monetary policies. In England, the FTSE 100 fell 1.4% after the Bank of England said it would keep its bank rate low at 0.5% until unemployment hits 7%. At that point the bank would not automatically raise interest rates but would reassess its current policy. The unemployment rate in England is currently 7.8%.
U.S. stocks continue to fall as worries build over the Fed's tapering of asset purchases. The Federal Reserve has been buying $85 billion worth of long-term assets each month in an effort to bring down Treasury bond and mortgage rates so that banks will invest in assets other than T-bills and mortgages. In June Bernanke reiterated that the Fed will continue its current "quantitative easing" until its targets of 6.5% unemployment and 2% to 2.5% inflation are reached. However, Bernanke also shook up stock and bond markets when he said that if the economy continues to improve, he could see the Federal Reserve beginning to wind down its purchases as soon as the end of this year. His comments caused a large sell-off in the bond and mortgage markets that the Federal Reserve had not expected.
Members of the Federal Reserve have been talking to the media in an effort to get their message across that the economy is improving but the Fed will continue its purchases as long as necessary. The metaphors some are using are quite telling. My favorite line came from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond: "In other words, the Federal Reserve is not only leaving the punch bowl in place, we're continuing to spike the punch, though at a decreasing rate over the next year."
Yesterday, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the Fed could taper its asset purchases at any of the next three FOMC meetings if it sees signs of stronger growth. There have been multiple signs of tempered growth, and we'll have to see whether the Fed eases up at all.
So what can an investor do in times like this? It's hard to stay sober while everyone around you is drunk on Fed-stimulus punch, telling you to join in on the fun. My advice: Keep learning, focus on your goals, have an investing plan, stick to it, and ignore the crowds.