The Dow Climbs Triple Digits, but Investors Should Stop Expecting Fed Bailouts
The stock market has become increasingly turbulent as the end of 2014 approaches, with investors dealing with uncertainties ranging from the success of the holiday shopping season to the plunge in oil prices and its consequent effect on the geopolitical and global economic picture around the world. Yet as they've done repeatedly over the past several years, investors remain bullish as they look to the Federal Reserve and its coming pronouncement of its monetary-policy direction later this afternoon as another chance for central-bank action to help support the long-term uptrend in stock prices. As of 12:30 p.m. EST, the Dow Jones Industrials were up 130 points, and the S&P 500 climbed 1% as it sought to regain the 2,000 level that it gave up on Monday.
Federal Reserve. Source: Wikimedia Commons
Why the Fed matters nowMany stock market analysts had hoped that by now, the Fed wouldn't have nearly the influence over the markets that it has had since the financial crisis. With the end of quantitative easing, the Fed has actively sought to reduce the amount of stimulus that it has pumped into the economy, reflecting the belief that economic growth has taken root and should be sustainable without artificial assistance.
Yet now, market participants have turned their attention to the boilerplate language in the Fed's monetary-policy announcements, trying to figure out when they should expect the central bank to start raising short-term interest rates. For years, the Fed has said it would keep interest rates at their current low level for a "considerable time" following the end of asset purchases under quantitative easing, and investors have taken the position that before it started to raise rates, it would remove that language from its statement.
Given the recent market declines, bullish investors are hopeful that the Fed will hold off on making any changes to its policy until some of the volatility eases. Pointing to the weakness in the Russian economy, some believe that the Fed will be hesitant to do anything that could send credit markets moving wildly, as they did in mid-2013 when the Fed first hinted at the coming end to its quantitative easing activity. Moreover, with energy prices having fallen so sharply, bulls believe the Fed could afford to keep rates low longer without violating its duty to keep inflationary pressures under wraps.
The Fed's influence on the DowMuch of today's gains for the Dow have come from energy giants Chevron and ExxonMobil . Both stocks are up between 3% and 4% as bargain-hunting investors believe that the worst of the declines in the price of oil could be over.
Still, other industries have a more direct stake in what the Fed does. JPMorgan Chase is more than 1%, and the end of a low interest rate environment could put downward pressure on its net interest margins if it doesn't come with a consequent increase in rates for longer-term bonds and loans. Even high-yielding consumer stocks like McDonald's are climbing sharply today, as hopes that the Fed will keep rates low longer make their dividends look more attractive to income investors.
Regardless of what the Fed does, investors need to acknowledge that the Fed won't continue to pump stimulus into the financial system forever. Eventually, the financial markets will have to stand on their own, and when that happens, investors will want to own shares of companies that have worked hard to take advantage of improving economic conditions. Rather than looking for a Fed bailout, smart long-term investors should look forward to the day when their efforts to identify high-quality stocks get the reward they so richly deserve.
The article The Dow Climbs Triple Digits, but Investors Should Stop Expecting Fed Bailouts originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron and McDonald's. The Motley Fool 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.
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