Fed's Bold Moves Lifts the Dow
Dec 12th 2012 3:05PM
Updated Dec 12th 2012 3:10PM
Anybody on Wall Street who says they dislike the Federal Reserve is either lying or clueless.
Stocks are up in midafternoon trading following the central bank's announcement that it will maintain a highly accommodative stance on monetary policy until the unemployment rate drops to at least 6.5%. As of 2:55 p.m. EST, the Dow Jones Industrial Average is up 44 points, or 0.33%.
Takeaways from the Fed's announcement
While it's easy to be desensitized to these announcements at this point in the economic recovery, the importance of today's decision shouldn't be overlooked.
In the first place, the Fed confirmed the notion that the economic recovery is unevenly distributed. While housing is improving, unemployment remains unacceptably high. And while household spending continues to advance, "growth in business fixed investment has slowed." This was notably similar to the observation investing great Mohnish Pabrai of Pabrai Funds recently shared with our own Morgan Housel, commenting on the fact that new-car sales are at historic levels despite a double-digit real unemployment rate.
Despite the positive signals, however, the balance is clearly tilted toward the less savory characteristics, such as joblessness. As the Fed noted: "The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
As a result of this concern, the central bank announced an additional round of quantitative easing. In this fourth round, the Fed will purchase $45 billion in longer-term Treasury securities per month once its so-called "Operation Twist" expires at the end of the year. These purchases, moreover, will be in addition to the $40 billion of agency mortgage-backed securities the bank is already buying each month to drive down mortgage rates.
Finally, and most significantly, the Fed announced the precise targets it's using to dictate its decisions. According to the official statement, the current policy "will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."
How stocks are responding
As I noted above, traders have welcomed the Fed's announcement by sending stocks broadly higher. At present, roughly two-thirds of the Dow's 30 component stocks are trading in the green.
Leading the way are shares of Hewlett-Packard followed closely behind by E.I. Du Pont De Nemours . Both are up by about 2% in midafternoon trading.
To say that HP has had a rough year would be an understatement. It's the Dow's worst-performing stock year to date, down by nearly 50%, and it took a further hit last month after reporting a massive $8.8 billion writedown related to its 2011 acquisition of Autonomy, a U.K.-based software company that HP is now accusing of fraud.
Meanwhile, as Fool analyst Dan Dzombak noted earlier, after the market closed yesterday, DuPont reaffirmed its full-year outlook, issued a better-than-expected forecast for 2013, and announced a $1 billion share buyback that will be funded by the sale of its performance coating business to private-equity fund Carlyle Group .
Heading lower, alternatively, are shares of Wal-Mart , the nation's largest retailer. In an interview yesterday, the company's president and CEO Mike Duke intimated that uncertainty surrounding the fiscal cliff is dampening consumer spending. According to Duke: "A week before the election only 25% of our core customers even knew what fiscal cliff meant. One week after the election, it was up to 75%. Now, these same customers, 15% are telling us this discussion about the fiscal cliff will affect what they spend on Christmas."
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The article Fed's Bold Moves Lifts the Dow originally appeared on Fool.com.John Maxfield has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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