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Did the Fed Minutes Truly Prompt Wednesday's Stock Market Slide?

The Motley Fool logo The Motley Fool 1/5/2022 Dan Caplinger

The stock market had a tough day on Wednesday. Losses for the Nasdaq Composite (NASDAQINDEX: ^IXIC) were the sharpest at more than 3%, but declines for the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) took both benchmarks well below their recent record levels.

Index

Daily Percentage Change

Daily Point Change

Dow

(1.07%)

(393)

S&P 500

(1.94%)

(93)

Nasdaq

(3.34%)

(523)

Data source: Yahoo! Finance.

Market participants largely blamed the Federal Reserve for today's drop, given that the bulk of the declines came after the central bank's monetary policy committee released the minutes of its December 2021 meeting. Yet little that the Fed said should have come as any big surprise to investors given prior press conferences and releases. Here's what the Fed minutes said and why investors need to look beyond them for an explanation of today's drop.

Federal Reserve bank building in Washington. © Getty Images Federal Reserve bank building in Washington.

The main points the Fed made

The Federal Open Market Committee minutes repeated many key points that Fed chair Jerome Powell and the central bank had already said. Among them were:

  • Investors shifted their expectations for the timing of reductions in policy accommodation -- that is, reduced Fed spending on Treasury and agency bonds and rises in short-term interest rates -- to be nearer to the present.
  • The Fed affirmed its belief that changes to the federal funds rate should be the primary tool for monetary policy, arguing that the impact of other measures such as quantitative easing is less clear and familiar to the investing community and the general public.
  • The economy is much stronger currently than it usually is with interest rates this low, which could make the Fed react more quickly to remove accommodative monetary policy than in the past.
  • Outlooks for inflation were higher than before, even as risks to economic growth were greater on the downside.

Some commentators pointed to the pace of tapering asset purchases and potentially raising rates as their key concern. Powell had been clear that asset purchases could end as soon as March, but some had hoped that the Fed would stand pat with the size of its balance sheet thereafter, rather than quickly allowing it to shrink.


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Selective selling

Once again, though, substantial swaths of the market didn't react very negatively at all to the news. Looking broadly across the market, stocks in the energy, consumer staples, materials, and utilities sectors barely moved lower at all.

Rather, it was largely the sectors that saw the biggest share-price gains that took the brunt of the damage on Wednesday. Technology stocks were the most notable casualties, with high-growth disruptors seeing outsized declines. Other areas where accommodative policy has helped bolster prices, including consumer discretionary and real estate, also struggled. Given that those sectors have been among the top performers over the past year, giving back some ground in a down market only seems fair.

Somewhat more surprising was a drop in the financials. Banks have hoped for higher interest rates for a long time, and so today's news might have seemed good. However, what really helps banks is having a big difference between short-term and long-term rates. If the Fed hikes short-term rates more quickly than expected, then it will shorten the period of time that banks can benefit from a more favorable rate environment.

Volatility is here

The only certainty for investors is that markets are likely to remain choppy as people try to digest the information they're getting. That shouldn't stop stocks from solid long-term performance, but whether today proves to be a near-term bottom or further losses ensue isn't something anyone can predict. Investors need to feel confident about the stocks they own and be able to weather whatever comes.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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