The Fed said today that the economy's getting better, so they may taper asset purchases at some point later this year/early next year. If they said the economy's getting better, why did stocks fall? is it fear? uncertainty? can someone please explain? Apologies in advance if this is a noob question. Thanks!
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The government's opinion on where the economy is going is pretty much a worthless piece of information. However, if the fed keeps printing money (all other things being equal) then equities should go up. Another valuable piece of information in terms of what drives stock prices is that the news and the economy don't matter, it's all about how those things do relative to what the market is expecting. In the short run anyway.
^ what?
Everything revolves around the credit markets and where interest rates are and where they are going. If the fed sees the economy doing well, they will cut back on buying assets and start raising interest rates. Higher rates constrain economic growth. That is why you might see stocks fall when talks of rates going up.
Yes
Good news is bad news. Improved wage and labor conditions will lead to the Fed reining in asset purchases and interest rates moving higher. Higher rates will raise the cost of debt (more friction for economic growth). With near zero yields, dollars move out of fixed income and inflate the equity market, perhaps because many don't know where else to invest. With higher yields over time, money will flow back into fixed income. Back to your question, the intraday move was a short term reaction to Bernanke's comments of eventually reining in the artificial simulation of asset prices.
In short - the market loves the juice. Thus, any commentary suggesting a pull-back can lead to days like today.
Didn't read the above comments, but I think it is basically a news reaction. The Fed today said they are going to stop asset purchases, which as we have noticed, QE has been a huge factor in this bullish market. Maybe investors took this as a statement that the heavy market growth will cease.. Not too sure on that one, but that's what I would guess from what happened today
What you said is correct from the textbook perspective. What I said is a lot more applicable. What part(s) are you confused with?
The [fed's] opinion on where the economy is worthless? If they think the economy is doing well, rates are going up, which is pretty fucking important, because everything revolves around credit.
Also the news and economy do matter for stock prices.
I guess the first part is relevant to how you interpreted the original post. I interpreted it as the OP fealt the stock market should go up because the Fed fealt good about the economy. That in itself is meaningless info, unless you are already assuming interest rates are going up.
As to the second part. The news and the economy only matter relative to what the market is expecting. For example if Company XYZ loses $1 billion dollars this year, when the market was expecting a $3 billion dollar loss... THAT IS FANTASTIC FUCKING NEWS FOR SHAREHOLDERS! The same principles apply to macroeconomic events and the stock market in general.
What assets do they buy?
The fed buys approximately $80 billion a month in assets. $40 billion in mortgage related securities and $40 billion in bonds. Might be a little closer to $85 billion actually.
Got it, thanks. Can anyone recommend some reading so that I can better understand this process? I understand approximately 0% of what the Fed actually does.
http://www.amazon.com/Economics-Banking-Financial-MyEconLab-1-semester/…
http://en.wikipedia.org/wiki/Quantitative_easing#QE1.2C_QE2.2C_and_QE3 an overview
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