Dollars and Sense: The markets aren't calm, but investors carry on

Markets tumble. I (and many others) have been warning you that the Federal Reserve Bank has been propping up the stock market for the past few weeks, and this week we saw some of the consequences. The Federal Open Markets Committee, which is the policy-making body of the Fed, met on Tuesday and Wednesday. When the meeting ended, Fed Chairman Ben Bernanke held a press conference, and the Dow immediately fell 200 points. On Thursday it fell 350 more. All in all, a pretty rough week for the markets.

Interesting week. But it was interesting to watch things unfold between Monday and Friday. On Monday, we got a report showing homebuilder sentiment jumped in June, rising to the highest level in seven years. And we saw significant gains in the markets on Monday. The markets were mixed on Tuesday and even on Wednesday for most of the day. Then came Bernanke’s late Wednesday press conference. In the space of about 15 minutes just before 3 pm, the markets fell almost 150 points. Just a few hours after the U.S. markets closed, the Asian markets opened, and they headed down, too. By the end of the day Thursday, markets worldwide were down 2 or more percent.

No panic. But here’s where it gets even more interesting. Investors know as well as everyone else that without the Fed’s monthly $85 billion stimulus shot, the market’s rally is unsustainable, yet the sell-off was fairly orderly. No panic. It looked like traders were taking some profits, locking in some gains, but not completely retreating from the stock markets. Alan Valdes, director of floor trading for DME Securities, said investors haven’t given up on equities, they were just locking in some gains, using the Bernanke news as an excuse to do what they’ve been wanting to do for a while, but afraid to do so long as the markets kept going up.

Big deal. That said, most analysts agree that this week’s announcement by Ben Bernanke was a pretty big deal. We’ve seen a more than five-year era in which the Fed has artificially kept interest rates low and, in the past couple of years, further stimulated the economy with Quantitative Easing, the bond-buying program. And what happened on Wednesday was a signal that this era is coming to an end. What this means, no one really knows. Some analysts say we could see inflation, perhaps even hyper-inflation, in the years ahead. Others, including the Wharton School’s Jeremy Siegel, think the markets will take a breath but continue upward. One thing’s for sure: We’re likely to continue seeing the effects of this week’s announcement for months to come.

The week ahead. But, as I said above, the selloff has been pretty orderly. Investors seem to be trying trying hard not to overreact, to find out what the true value of this market is, and what the true state of the economy is. The week ahead will give us a few chances to do that, with a lot of economic data coming out. May durable goods orders, May new home sales, and May consumer confidence reports, will all be out on Tuesday. On Wednesday, we’ll get a first quarter gross domestic product revised number. And on Thursday, May personal income numbers. If these reports come in at or above expectations, that could ease the selling and cause the markets to settle down as we head toward the Fourth of July holiday.