The S&P; 500 bounced against its 1,300 level before selling off yesterday, while the Dow actually broke through its 12,000 milestone, which it briefly held before profit taking pulled it back below.
The cause for this continued bullishness came from the Fed, as it was announced that the current policy with zero interest rates will be continued.
In its statement the Fed said that “the economy continued to be constrained by high unemployment, modest income growth, depressed home prices and tight credit. The central bank conceded that commodity prices are rising.
But core inflation is still trending downward, and that’s why it left its target on its key federal funds rate at 0% to 0.25%. And because it has mandates to control inflation and foster maximum employment, the Fed is continuing its plan to buy in $600 billion in Treasury securities by the end of June.”
It was not as much what the Fed said but, more importantly, that rates will remain low, which is what Wall Street had anticipated despite concerns over globally increasing prices, especially in the food arena.
While the respective 1,300 and 12,000 levels by themselves are meaningless, they do have psychological value in that they confirm that the current upward trend remains intact. Barring any unforeseen news, I would expect these milestones to be conquered in the near future.
On the other hand, the Fed’s announcement is also a clear sign that all is not well, and that the economy continues to sputter along at best, especially when it comes to housing and unemployment.
These are major domestic issues that can have a profound impact on market direction if they are not being resolved or improved upon at some point in the future. Just because the Dow may break the 12,000 barrier does not mean all is smooth sailing from heron forward.
Unexpected headwinds can surface at anytime. You don’t have to anxiously look for them, but simply be prepared and have a plan of action when they appear.