The stock market fell Thursday morning by more than 300 points following the Federal Reserve’s announcement of its plan to sell $400 billion in short-term securities in order to purchase long-term holdings. This plan, named Operation Twist, marks the Federal Reserve’s latest efforts to bolster a weak economy.
This announcement followed a two day meeting, with the Federal Reserve hoping to ultimately reduce interest rates on consumer and business loans, as well as lower interest rates on mortgages. Some analysts have stated that the shift may produce modest results by boosting stock prices, and reducing borrowing costs, while others fear that the move could result in an escalation of inflation.
Investors fear that the latest asset-buying plan will not be enough to support the sluggish economy in the US, and prevent a double-dip recession. As investor confidence weakens due to the decline in private sector business activity in China and Europe, and fears of a global recession escalate, many have run for cover in traditional safe-havens such as the US dollar.
Brace Yourself For More Uncertainty
With the Federal Reserve igniting concern over the future of US economic growth, and the possibility that Greece could default on its debts, it seems that the downward pressure on the stock market has only just begun.
News coming out of the Federal Reserve and central banks has caused the mood of the market to take a decided turn for the worse, seemingly based on the use of the word “significant” by the Fed on Wednesday. This announcement comes at a time when congress and the President are attempting to cut government spending and raise taxes for wealthy Americans.
Investors have also been watching the Eurozone closely, and representatives from the European Commission, the International Monetary Fund, and the European Central Bank will meet next week to decide whether Greece will receive additional financial support in order to avoid default.
In markets such as the one we are seeing here, it seems to be a “shot first and ask questions later” atmosphere, as entire sectors see declines regardless of fundamentals. The following days could provide buying opportunities for value-minded investors, with a strong focus on yield.
Stop Losses, Stabilize Your Portfolio, And Prepare For Stock Market Volatility
Thursday’s dramatic stock market decline may have left you wondering what to do next to brace for the market’s impending volatility. The coming weeks will most likely become the definitive, text book argument for the use of stop-loss and trailing-stop orders. The first step in your portfolio rescue plan should be to try and stem any bleeding the sell-off may have caused.
If you do not have an exit strategy in place, now is the time to get one. A large portion of your investing success will ultimately come down to your ability to lose successfully. Go over your investment plan with a fine-tooth comb and set your stop-loss orders and trailing-stop orders accordingly.
Your next move will be to stabilize your portfolio in the way of realizing gains. If you have made significant gains in a security, now may be the time to take some profits off of the table. You can always reinstate your position at a later time as emotional trading subsides, with shares most likely at a discount.
Finally, you should be on the lookout for battered, high-quality, dividend paying companies that may have fallen victim to a broad market sell-off. It may be worth your time to look at the recently battered coal industry, as this may be an industry with upside plays and great opportunistic buys.
Using this time to build your wish list, and making a handful of changes to your portfolio could help cushion your investments during the upcoming uncertainty.