Beginning with the unprecedented market pop, Federal Reserve’s announcement intriguingly created an ephemeral surge in the Wall Street. The exact reasons behind it can be attributed to various factors, namely the Central Bank’s policies, the robust economic growth and the ebbs and flows of investor sentiment.
The day which is becoming commonly referred to as ‘Fed Day’ led to immediate reactions in the trading activities of market participants. A considerable number of financial experts believe that it signals the Federal Reserve’s continuation of their loose monetary policy stance, striving to resuscitate the economy from its pandemic-induced coma. The markets responded positively to this news, with investors quickly buying into assets to benefit from potential economic growth.
Speaking in numbers, the Dow Jones Industrial Average jumped more than 300 points post the Fed announcement, while the broader S&P 500 along with the tech-heavy Nasdaq Composite Index also reached for the sky. The financial markets, almost literally, popped on the Fed Day.
Surprisingly, this market pop was transient and took an unexpected downturn at close. As the dust settled, marketplaces experienced a drop, slicing off a huge chunk of the previous enthusiastic gains. The Dow Jones, for instance, ended lower by about 0.5% after its earlier rise. The S&P 500 closed down by 0.6% while the Nasdaq Composite Index fell by 0.2%.
The abrupt pop and drop phenomenon showcased an undeniable reality of investing; volatility is an unwavering characteristic of financial markets. These fluctuations could be largely credited to investor sentiment that is deeply entwined with the decisions made by the central banking authority.
The real key behind this fluctuation rests within the details of the Federal Reserve statement. While the Fed did promise to keep interest rates close to zero, it also announced that it would allow inflation to move modestly above its 2% target for some time, a policy that alarmed some investors about future economic instability.
Moreover, market sentiment faltered in deciphering the Fed’s murky outlook of the economy. The fact that the Fed plans to hold steady until 2023 has likely sparked concerns about longer-term economic effects of the pandemic, leading to the market’s drop.
Investors in general, are faced with uncertainties on both the health and economic fronts. There is no concrete knowledge on when the pandemic will end or when the world can return to pre-pandemic levels of operation. Hence, marked by such ambiguities, it makes complete sense for the market to show such erratic behaviour as depicted on the Fed Day.
Large swings in the marketplace are a reflection of how the investors are weighing the balance of risk and reward. In conclusion, the Fed Day story of markets making a pop, then a considerable drop, illustrates the potential repercussions of the central bank policy announcements while vividly portraying the volatility inherent in financial markets.
