Subject: When the Fed speaks Markets Listen

Well this has been a pretty interesting week for investors.  The stock market suffered a considerable drop over the past couple of days, coupled with significant drops in gold and bonds(bond values go down when yields go up)have created considerable concern and heartburn for investors .  Most attribute the significant rise in volatility to the statements made by Fed Chairman Ben Bernanke Wednesday afternoon.

With that said, let’s look at what’s going on right now. Markets, like investors, hate uncertainty. Thus, when the Fed announced their plans to begin tapering its stimulus program, it forced the financial markets to recognize that the government is dialing back its commitment to stabilize the economy. Of course, the Fed is pulling back because the economy is actually improving, but this news was enough to make investors nervous and, subsequently, the market fell.

As scary as market drops can be, it is important to keep things in perspective. Even as the market continued its slide Thursday, positive reports on the real economy were released. Housing sales are up, consumer sentiment is up, and the leading economic indicators are up. This matters because the market ultimately depends on the real economy.

A return to normalcy

With a stronger real economy, we not only will have higher interest rates, we should have higher interest rates. The Fed’s proposed policy shift simply brings us back to normal—which is where we should want to be as soon as possible. For the Fed to publicly signal this shift is a sign that it thinks things are getting back to normal. This is good news!

The kind of volatility we’ve seen lately is also normal. The U.S. markets recently finished one of the longest runs on record without a significant correction. Based on history, the current volatility is not only normal, it is overdue.

A pullback like the one we are seeing in the markets is also healthy. Bubbles occur when markets get disconnected from reality. A pullback provides a very healthy pause for markets to reconnect with what’s actually happening. As is the case with so many things that are good for us, the volatility is necessary, if not enjoyable.

Bumps on the road to recovery

It’s possible (and even likely) that we’ll see more volatility in the market as interest rates and other factors work toward stabilization. Concerns over the market should be tempered, however, by the ongoing strength of the real economy. The road back to normalcy may be rocky, but it will ultimately lead to a more sustainable environment for future market gains.

The one thing the past 13 years has taught us is not to panic.  We have seen scary selloffs that test our fortitude, only to see rallies that take the market to new highs.  It is important to stay vigilant and aware, how we react to the short-term volatility of the markets can have a significant impact on our long-term success.  If you have any concerns about your portfolio, plan or individual positions, let us know.  It is more important in these challenging moments that you have confidence in your portfolio; it is easy to keep the confidence in good markets.

We appreciate your continued confidence; let us know if you would like to discuss any concerns.

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