Today the Federal Open Market Committee (FOMC) that guides our economy with monetary policies announced that it will continue its current level of purchases ($85 B/month) of U.S. Treasuries and mortgage notes in order to lower interest rates and continue stimulating the U.S. economy. This was a big surprise, since the vast majority of financial gurus had predicted that the amount of FOMC’s purchases would begin to taper down starting today.
This message from the FOMC is both good and not so good. It certainly is good for stocks as easy money tends to inflate stock prices. It is not so good because it indicates that our Federal Reserve (Fed), especially Chairman Ben Bernanke, is concerned that the U.S. economy is not strong enough to sustain a higher growth path without more stimulus. Should the economy fail to gain momentum as evidenced by stronger job creation in the next 3-6 months, the Fed will continue to provide its high level of bond buying stimulus. The Fed is targeting a 6.5% unemployment rate, down from the current 7.3% unemployment rate. The Fed hopes to reach this target sometime in 2014.
The stock markets reacted very positively to this surprise move, as both the Dow and S&P 500 hit all-time highs. Our Fun Stocks Index also gained over 10% over the past week and reached its all-time high of up 534.31% (since 1/1/2009).
Comparing performances since January 1, 2009 (3.8 years):
- Fun Stocks Index – up 534.31%
- NASDAQ 100 Index – up 166.68%
- S&P 500 Index – up 91.77%
- Dow Jones Index – up 79.03%
Investors should maintain their stock holdings, buy selectively, and begin to take some profits if there are serious signs of the economy not strengthening as the Fed is hoping it must.