What's Behind the Stock Market Decline?

Normally, stocks rise when there are signs of better economic growth. But recently, the reaction has been the opposite. Stocks have declined because stronger growth suggests an earlier reduction in the Federal Reserve's $85 billion in monthly bond purchases. In fact, after the two-day Federal Open Market Committee policy meeting, the Fed indicated that if the economy continues to improve as expected, they will begin to reduce bond purchases later this year. In addition, they will likely end the bond purchases altogether by the middle of 2014. As a result, stocks fell and long-term interest rates rose sharply as well.

The Fed has also said they'll watch the economy and adjust their plan as required. This suggests they'll continue to buy bonds as long as necessary to support the economy. But for almost a month, stocks have swung back and forth, anxiously speculating about the timing of the Fed's next move. The Fed's post-meeting comments were more optimistic about the economy than expected, indicating the economic risks are diminishing. The Fed also released stronger economic forecasts, and financial markets are adjusting to the expected policy changes ahead.

Staying Invested When Markets Move

During market volatility, it's important to take a broader view. Remember that stocks may decline in the short term in response to the Fed's plan to trim back its support, and that market pullbacks can happen at any time without warning. However, the reason for the Fed's recent comments is an improving economy, and that's positive for stocks over time. Consider using short-term pullbacks as an opportunity to add stocks at lower prices.

The anticipated slowdown in Fed bond purchases is likely to continue to push long-term interest rates higher, which means long-term bond prices could continue to decline. Make sure you don't have too much of your fixed-income investments in long-term bonds.

Your Next Steps

If your portfolio has the appropriate mix of stocks and bonds -- based on your long-term goals, risk tolerance and current situation -- then you should consider staying invested. As markets adjust to less support from the Fed, they'll refocus on the still-positive fundamentals of earnings and economic growth. But if you haven't reviewed your portfolio recently, then you may need to make some adjustments to prepare for the changing markets ahead.

Sincerely,

Jeff Smith, AAMS®

Financial Advisor

Past performance does not guarantee future results. Make sure you consider the risks of investing, including loss of principal, before making an investment decision.