Please ensure Javascript is enabled for purposes of website accessibility

Will the Fed Send Stocks Soaring Next Week?

By John Maxfield - Sep 14, 2013 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

On Wednesday afternoon, the central bank is slated to release its most recent statement on monetary policy.

Make no mistake about it: Next week is all about the Federal Reserve. On Wednesday afternoon, the central bank is slated to release its most recent statement on monetary policy. The guidance therein will almost invariably dictate the direction of the S&P 500 (^GSPC 0.23%) for the week.

Since September of last year, the Fed has purchased $85 billion every month in long-term Treasuries and agency mortgage-backed securities in an effort to reduce long-term interest rates and thereby fuel the ongoing economic recovery. "The Committee is concerned," it noted at the time, "that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions."

The impact has been particularly noticeable in the housing market -- which isn't coincidental, given that one of the Fed's objectives was to "support the mortgage market." At one point, the 30-year fixed rate mortgage even dipped below 3.4%, less than half of its long-term average, leading to a dramatic improvement in existing-home sales. In July, the number of previously owned homes that sold was up by 17.2% on a year-over-year basis.

But the tenor of this conversation changed in May after the Fed intimated that it could soon begin to taper its support for the economy. As Ben Bernanke noted in a question-and-answer session with the Joint Economic Committee on May 22, "In the next few meetings, we could take a step down in our pace of purchase."

Since then, virtually no economic release has been perceived but through the lenses of the central bank. "For the past several months, the stock market has been afflicted with a degree of schizophrenia," observed Tomi Kilgore of The Wall Street Journal on Friday. "On some days, weak news on the economy is good for stocks. On other days, it is strong readings on the economy that give stocks a boost."

With this in mind, while it's tempting to predict what will happen to stocks when the Fed does pull the trigger on a taper, doing so is fraught with peril. That said, there are two conclusions that seem safe to make.

First, long-term interest rates will head higher. In the short run, this will weigh on the balance sheets of banks including Bank of America (BAC -0.36%) and JPMorgan Chase (JPM -0.78%), both of which experienced multibillion-dollar write downs on their asset portfolios following the Fed's announcement in May. Over the longer term, however, the resulting expansion in their net interest margins should more than make up the difference.

Second, this will put further downward pressure on the housing market. Applications to refinance mortgages have fallen by 70% since the beginning of May. This development has led Wells Fargo (WFC 0.00%), the nation's largest mortgage originator, to predict that its home-loan volume will drop to roughly $80 billion in the current quarter, following seven straight quarters of $100 billion-plus in originations.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,283.74 (0.23%) $9.70
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$36.28 (-0.36%) $0.13
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$121.64 (-0.78%) $0.95
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$46.14 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
394%
 
S&P 500 Returns
127%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.