If you want some free stock trading education that illustrates the type of news that impacts the price of U.S. stocks, the Federal Reserve statement released on June 19 and its subsequent effect on the equities of companies based in America is a great example.
The S&P 500 Index, which is considered a benchmark group of stocks by many market participants, did not have the strongest day, trading 0.9 percent lower at 3:07 p.m. in New York, according to Bloomberg. The Dow Jones Industrial Average was also lower at this point in the day, at 15,180.58. This figure represented a 0.9 percent decline during the course of the trading session.
During Monday and Tuesday, the benchmark S&P surged 1.5 percent, the media outlet reports. After this market rally, Federal Reserve Chairman Ben Bernanke provided little insight into the future plans of the central bank. He stated that as the economy is less at risk of recession now, the Federal Reserve may "moderate" its asset-buying program in 2013.
These increases in value were created as a result of global market participants speculating that the Federal Reserve was unlikely to indicate any changes to the current asset-purchasing regime of buying $85 billion worth of securities every month, according to MarketWatch.
Markets prepare for stimulus reduction
This program began in 2012, and has coincided with the Federal Reserve's balance sheet rising to higher than $3 trillion. Now, many investors are trying to get a better sense of what investors will look like once this record stimulus is eliminated.
Randy Frederick, managing director of active trading and derivatives at Charles Schwab, noted this preparation, the media outlet reports.
"The market is trying to position itself for a less-active Fed, and maybe a more normalized interest-rate environment," the market expert stated.
The S&P rose to a recent high on May 21, when it hit 1,669.16, according to Bloomberg. The next day, Federal Reserve Chairman Ben Bernanke stated in testimony given before Congress that if the labor market recovers to a positive enough state, existing asset purchases could be lowered.
In the current situation, the Federal Reserve must communicate that its monetary easing stimulus will have to be reduced at some point, but also refrain from having too great a negative impact on the sentiment of market participants.
George Rusnak, national managing director of fixed-income strategies for Wells Fargo Private Bank in Philadelphia, summed the situation up when he spoke with the media outlet via telephone.
"The Fed's walking a tightrope here," he stated. "They're balancing preparing the markets that tapering is going to begin, but at the same time, comforting them that it's not going to be too dramatic and too quick to be disruptive. It's a fine line."
Possible stimulus alteration
There is a chance that the existing program of bond purchases and interest rates could be changed depending on the state of the labor market and the economy, the Federal Open Market Committee indicated at the end of the policy meeting, according to MarketWatch.
"I don't think we're done here, I think we could see a very big change," Frederick stated. "If the market was worried about this, the [CBOE Volatility Index] should have been up." The media outlet reports that this measure usually moves in the exact opposite direction of the benchmark S&P 500.
Federal Reserve policymakers have indicated their prediction that by the end of 2014, the jobless rate could drop to between 6.5 percent and 6.8 percent, according to Bloomberg. As a result of its decline, the benchmark lending rate of the Federal Reserve could be increased.
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