If you want some stock trading education involving how equity prices can be affected by uncertainty that exists in the markets, the action that investors took on May 29 in response to the recent communications of Federal Reserve officials can serve as a great example.
The blue-chip S&P 500 Index did not have the greatest day, finishing 9.08 points lower at 1,650.98, and the Dow Jones Industrial Average fared worse, closing down 105.78 points at 15,303.61, according to MarketWatch. The Nasdaq Composite also fell in value, dropping 14.60 points to 3,474.28.
Federal Reserve statements stoke markets
One major contributor to these falling asset prices was a speech that Federal Reserve Bank of Boston president Eric Rosengren made, during which he emphasized that it would be reasonable to continue robust monetary easing, at least for now, Bloomberg reports.
The Fed official stated that making certain changes to the existing program of bond purchases was at least possible in the event that both the market for jobs and the overall economy exhibited strong enough conditions, according to the media outlet. MarketWatch reports that such statements were roughly in line with testimony that Federal Reserve Chairman Ben Bernanke made during the week ending on May 24.
The U.S. central bank has been buying $85 billion worth of debt-based financial instruments per month. In addition, it has been holding its benchmark interest rates close to record lows. The European Central Bank and the Bank of Japan have also been harnessing highly-aggressive stimulus measures, and recently indicated that they plan to sustain these efforts, according to Reuters.
While these easy money policies have been harnessed by central banks throughout the world, equities have enjoyed sharp rallies. The S&P 500 Index has spiked more than 15 percent this year. This has helped the group of stocks extend gains it made last year, as it surged more than 13 percent.
Jack De Gan, principal and senior advisor at Portsmouth, New Hampshire-based Harbor Advisory, noted that the situation for equities could soon change.
"High yield stocks did well for most of the year but we are seeing a rotation towards cyclical stocks, which tend to outperform when the economy is improving," De Gan said.
He noted that this illustrates the importance of Fed stimulus measures, stating "That ties with concerns that the Fed may wind down the stimulus earlier-than-expected."
During the prior session, the S&P 500 surged 0.6 percent and the Dow rose to a record level, as markets responded to robust economic data in the form of sharp appreciation in housing prices and consumer confidence that rose to its highest level since 2008, according to Bloomberg.
Kate Warne, investment strategist at Edward Jones, told MarketWatch that "Today is a reversal of yesterday, which is not particularly meaningful in and of itself, other than a warning that Europe can cause volatility, which we haven't seen happen in a while, and that the rest of the world is not in quite as good shape as the U.S. is."
She added that "Anytime we've seen stocks rise, people tend to get jittery about what will happen next."
The market expert noted the fickle nature of investors, indicating that global market participants may be quick to sell of their equities if they become concerned that corporate earnings will suffer, the media outlet reports.
Such sentiment was expressed by De Gan, who told Bloomberg that since the market is so high right now, market participants will use any excuse to sell their positions to take profits.
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