Why the Dow Has Gone Mad


Down goes the Dow Jones Industrial Average on a day where Wall Street has lost any pretense of patience or rationality. Simmering fears over the end of quantitative easing finally boiled over today as the Dow took a massive tumble, shedding more than 280 points midway through the afternoon trading session. Despite stocks' gut-wrenching nosedive this week, you shouldn't panic about the sharp drop-off. Why not? Let's dig into why stimulus fears have ravaged the markets recently.

Smart investors need not worry
Federal Reserve Chairman Ben Bernanke sparked the Dow's descent with his comments that quantitative easing will taper and eventually end if the U.S. economy improves. Think about that: Bernanke's suggestion that the economy may be able to stand on its own has sparked fear in the markets. The U.S. recovery is something we should be celebrating, and it indicates that companies and stocks could be in for good times ahead. Instead, short-term traders have captured the market's attention, focusing only on the pot of easy money that may soon dry up.

It's not as if we didn't see this coming, either. Bernanke said long ago that stimulus was tied to the economy's rise, and QE infinity couldn't really last forever. No, this drop-off is indicative of short-term volatility, not long-term performance. The VIX fear gauge has spiked more than 12% today as a result of traders panicking about slowing stimulus funds, but will that affect most stocks in the long run? No. What will determine the long-term direction of the markets are an improving economy, a resurgent housing market, and stronger consumption -- all things that won't need stimulus to grow in the future. Long-term investors grounded in stock fundamentals need not worry about losses due to the market's impulsiveness. Strong businesses and sturdy stocks will almost always bounce back from such trivial movements.

However, smart investors should prepare for more days like this. Stimulus tapering will likely happen over the course of months into 2014; expect short-term-focused traders to live and die by how the quantitative-easing saga comes to an end.

Take a look at Dow stocks poised to succeed in the long term, stimulus or no stimulus. American Express shares have managed to stave off the worst of the Dow's losses today, shedding only 0.9%, and with consumer confidence near multiyear highs, this financial stalwart could see more green in its future. Hiring has picked up slightly year over year in 2013, and more jobs will lead to more consumption. Considering that American Express has managed to boast a net income higher than some of its lofty credit-card rivals recently, rebounding consumption is looking great for shareholders.

On the other side of the Dow, Microsoft is among the biggest losers on index today, with shares falling 2.9%. However, its troubles have nothing to do with the improving state of the economy or the drying-up of stimulus funds. The company's backpedaling from its previous heavy-handed policies regarding its next-generation Xbox One video game console has generated mixed sentiment among consumers and shareholders. While many view Microsoft's reversal of its earlier used-games restriction and "always-on" Internet connection as a win for consumers, others see the company succumbing to a fickle fan base and rival Sony's early lead in console pre-orders.

One thing's for certain, however: Sony's PlayStation 4 next-gen console scored a serious victory by touting its consumer-friendly policies over Microsoft's Xbox One, and if Microsoft hadn't pulled an about-face, the company risked losing sales to its rival in a big way right out of the gate. That's one thing no company wants to see -- especially one like Microsoft, which already struggles in other areas of its business, including its poorly received Windows 8 operating system and disappointing Surface tablet.

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The article Why the Dow Has Gone Mad originally appeared on Fool.com.

Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published