Friday, June 21, 2013

The Market's Plunge

Fed chairman Ben Bernanke, at the conclusion of the Federal Reserve’s meeting on Wednesday, came out and basically said the Fed wasn’t changing any of its policies, either its near-zero interest rates or its asset purchases. Nevertheless, the S&P 500 and Dow Jones Industrial Average  just concluded their worst day of the year.
What happened? Bernanke simply alluded to the fact that the Fed’s bond buying was going to have to come to an end at some point. He even put a bit of a definition on it, saying that when unemployment reaches 7 percent, the economy would have improved enough to warrant a tapering of the asset buying. The unemployment rate is currently at 7.6 percent, and most projections have it falling to around 7.0 percent by the end of the year.
The Fed’s asset purchases have been a great boon to the bull market we’ve enjoyed over the past four years, so any tapering or ending of them is likely to have a dampening effect on stock prices. But investors should have known that the purchases were going to end at some point. The surprise here is mostly that the reaction has been so swift. After all, as Bernanke said, for the moment nothing has changed.

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