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.
On Tuesday, the Dow Jones Industrials (DJINDICES:^DJI) weren't able to build on their impressive gains from Monday, falling nine points to finish at 15,875. Broader market measures posted somewhat larger declines, but even the S&P 500's move only represented a 0.3% drop for the widely followed benchmark. With so much speculation about whether departing Fed Chairman Ben Bernanke will begin on the road toward slowing the growth of the Fed's balance sheet or leave that job to heir apparent Janet Yellen, it's clear that the health of the stock market's nearly five-year-old rally could depend on the right course of action. In addition, Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), and Caterpillar (NYSE:CAT) arguably have the most at stake in which direction the Fed takes with monetary policy.
For Goldman Sachs, clarity on the interest rate front could make or break the investment bank's proprietary trading operations, which have historically been heavily dependent on fixed-income securities trading. In its third-quarter report, Goldman noted that proprietary trading revenue fell 32%, with low volume in fixed-income trading playing a pivotal role in holding back growth. Uncertainty has led to volatility in bonds, but if the Fed's strategy becomes more apparent -- even if it includes rising rates -- it could nevertheless encourage bond traders to start becoming more active and give Goldman opportunities to use its skill to its advantage.
JPMorgan Chase, meanwhile, could become a victim of a potentially innovative solution that the Fed could use. Right now, JPMorgan and other commercial banks have a total of $2.5 trillion deposited with the Fed earning 0.25% in interest, and the vast majority of that money represents excess over the amounts that the Fed requires banks to keep in reserve. If the Fed decides to stop paying interest on those excess amounts, it could cut a key source of interest income for JPMorgan and force it to make loans to replace the lost income. Yet with some banks having said they'd start charging depositors on their accounts in such a case, the Fed might choose not to play chicken with JPMorgan and its peers on that front.
Caterpillar doesn't have a direct financial stake in the Fed's decision, but it could nevertheless be a big mover based on the Fed's decision. Sentiment in the past week has turned decidedly toward a reduction in quantitative easing, with strength in the manufacturing industry leading some investors to believe that the final piece of the Fed's puzzle is in place to start tapering. Yet for Caterpillar, any economic improvement it has seen has been minimal at best, and poor commodity prices and weak construction activity continue to weigh on its heavy-equipment business. The Fed's decision will go a long way toward establishing just how serious the central bank is in waiting to make sure that every part of the economy is on a track toward recovery -- even Caterpillar's hard-hit industry.
Fool contributor Dan Caplinger owns warrants on JPMorgan Chase. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Goldman Sachs and owns shares of JPMorgan Chase. 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.