The Fed has spoken and the market does not like it. Yesterday’s steep losses combined with today’s big slide represent the largest two-day drop for the S&P 500 since November 2012. The S&P 500 was down 1.6% by mid-afternoon in New York, while the Dow Jones slid by a similar percentage.
Ben Bernanke’s press conference yesterday revealed that tapering is pencilled-in for later on this year, dependent on data. Today’s data largely exceeded expectations (with the notable exception of the weekly jobless claims), re-enforcing the notion that a scaling back of stimulus is on its way..
That has sparked selling, but the end is far from nigh for stimulus. As Bernanke was keen to point out, this is not slamming on the brakes, rather just easing up a little on the accelerator.
The Fed’s balance sheet is going to be expanding for many months to come, but on today’s evidence there’s a lot of disappointment and we could be facing a stretch of volatility before the dust settles. Case in point: the volatility index hit a new high for the year today, breaking above 19 and showing how nervy this adjustment is making a lot of people..
This is just the first signpost before we start on the long road back to normal monetary policy and there could be a few pot-holes along the way.