Federal Reserve dampens Wall Street upswing

With the Federal Reserve hinting a significant change in bond investment policy, Wall Street dipped on April 5. This effectively smothered a rally which has its origins in the excellent jobs report generated by the private sector. Concerns by investors about the ability of the Trump administration to provide the promised tax cuts were further intensified when some lawmakers admitted that deep divisions exist in Washington.

Markets dip

The S&P 500 index dropped 0.3 percent, or 7.21 points, to touch 2,352.95. The Dow went down by 0.2 percent or 41.09 points to touch 20,648.15.  It also suffered the biggest intra-day reversal towards the downside in 14 months during Wednesday's trading session. The index has trimmed its 198 points gains to end at session lows, a drop of almost 50 points.

The Nasdaq dropped 0.6 percent, or 34.13 points to scrape at 5,864.48. There was a 1.2 percent or 16.03 points drop of Russell 2000 small company stocks index to 1,352.14.

Of Fed and Bonds

A number of Federal Reserve policymakers hold the opinion that the central bank of the United States must take a number of steps so that it could trim its $4.5 billion value balance sheet. This is possible as long as economic data continues to be positive. The minutes of the Fed meeting pushed out the fact that a few participants regarded the equity prices quite high when compared to the standard valuation measures. This has been seconded by Janna Sampson of Lisle, Illinois headquartered Oakbrook Investments LLC. She said that participants were scared by the possibility of a stock market bubble. There is also the negative thought that balance sheet normalization could deter growth, or there is a possibility of increased rate hikes.

Bonds worth trillions of dollars were bought by Federal Reserve during the 2008 to 2009 financial crisis. This was done to jump start the economy. When these bonds matured, the Fed bought more bonds. This may now end. With the maturity of the older ones, the central bank will soon witness the shrinking of its holdings.

Quite a few investors have hoped for an acceleration of President Donald J. Trump's tax cut pledge post failure to pass the healthcare reform bill as tabled by the Republicans. Their hopes were dashed when Paul Ryan, the House Speaker and a Republican elected from Wisconsin, said on  April 5 that tax reform will take a longer time to accomplish compared to healthcare.

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