On Wednesday, September 18, the Dow set an all-time high at closing, as did the S&P. The boom came shortly after the Federal Reserve announced that it would continue its economic stimulus program.
However, the investment-high did not last long. The stock saw itself losing all of its gains from Wednesday on Thursday and Friday. Economic pundits believe the dip in the market is due to uncertainty surrounding the actual strength of the market: “Investors need to take a step back and consider the idea that maybe the U.S economy is on weaker footing than we originally thought,” stated Marc Doss, regional CIO for Wells Fargo.
Investors were surprised when Ben Bernanke announced that the Fed would continue its $85 billion bond-buying program. All signs pointed to the program being decommissioned this September. However, the Federal Reserve stated that it “decided to await more evidence that progress will be sustained” before ending the program.
The purpose of the Fed’s bond-buyig program is to pump money into the economy to encourage people and banks to borrow and lend more money. Thus, it is a program that would need to be implemented when the market is not at its strongest. Because of its continuance, investors are wary as to current market strength, hence the drop in the stock market after the announcement.
Companies themselves, however, seem to have much faith in the market. There have been 140 IPO’s added to the market this year, 46% more than 2012. More companies are offering IPO’s because they see promise and stability in the market. While this is generally seen as a positive sign, it does offer more risks to companies and could create a bubble situation of its own – the influx of IPO’s may start a trend which could diminish the quality of offerings and lessen peoples’ investments in said companies.
The main concern with the Fed’s bond-buying program right now concerns the time-table as to when the Fed will feel ready to end the program:
“Fed officials have never been able to agree among themselves what exactly would constitute the ‘substantial’ improvement in the labor market outlook that would persuade them to halt the monthly asset purchases. As a result, they have done a very poor job of communicating to the markets how improvements in the labor market should be gauged,” stated Paul Ashworth, chief US economist at Capital Economics.
There is also the concern that the market growth the US has seen in September is the result of quantitative easing rather than actual company growth. If this is the case, many investors, such as Doug Kass of Seabreeze Partners Management, believe that the Fed has gotten itself in a situation that it can’t escape: “There is no way out for the Fed once it started the process of printing. Getting in was easy. Getting out—not so much. The Fed is trapped and can’t end tapering or else the bond and stock markets will blow up. The longer this continues the bigger the inevitable burst.”
Then there are the other factors such as potential conflicts in the Middle East, worries over government shutdown, and the question of who will become the next chair of the Federal Reserve. In essence, nothing has changed – no one does not understand economics, and no one ever will.
Image via Wikimedia Commons