U.S. stocks rebounded yesterday after a dreadful Monday as the Fed promised to keep interest rates low until at least mid-2013.  The statement also referred to a “range of policy tools” that could be employed to spur the economy.  I cover the Fed’s statement more after the jump, but first I want to discuss the magnitude of yesterday’s market move.

Yesterday’s Dow’s gain was one of the ten biggest in its history.  It is very common for investors to panic when markets are falling, but investors risk missing out on big gains while sitting on the sidelines – and, as we saw yesterday, the biggest gains tend to come after the biggest losses.  Jumping out of the market requires you to successfully time the market twice: once when you sell and once when you get back in.  It is impossible to accurately time the market’s movement, and missing a few big days of gains can dramatically impact your performance.

The table below from Legg Mason using data from FactSet shows just that.

As you can see, the impact from missing the biggest daily gains over the past 20 years greatly decreased returns.  Short-term market fluctuations can be unnerving, but the likelihood of realizing a loss has historically decreased over longer holding periods.  The point is that successful investors must be patient and take a long-term view in volatile markets.

Market Activity for August 9, 2011

Sector Activity for August 9, 2011

 FOMC Statement

Here is a link the side-by-side comparison of the August and June Federal Open Market Committee (FOMC) statements.

The Fed indicated that economic growth has been “considerably slower” than expected, a downgrade from the June statement in which growth was considered “somewhat slower than anticipated.”  The statement also points out deterioration in overall labor market conditions in recent months.  The committee states that unemployment is now expected to decline “only gradually” and notes that “downside risks to the economic outlook have increased.”  The statement downplays inflation risks

The only real policy change was removing the “extended period” language in its interest rate policy and indicating that rates will remain low until at least mid-2013.  The Fed hopes that “giving an explicit timeframe is a way to target longer-term rates and promote investment and spending in the short term.”  The committee also signals that further action may be in the offing as they discussed a “range of policy tools” that they are prepared to employ to spur the economy if appropriate.  However, it will be difficult for the Fed to take any dramatic action given that there were three dissenters.

It is likely that we will see new policy mechanisms introduced at the annual Jackson Hole symposium from August 26-28, but the ideas may be focused on accommodation without further balance sheet expansion. 

Have a great day!

Peter Lazaroff, Investment Analyst

St. Louis, MO

www.acrinv.com