Dow to Fed: Stop Talking!

Dow to Fed: Stop Talking!

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Federal Reserve has been a friend to stock investors for years during the current bull market, as its cheap financing helps to bolster financial strength among many companies and push share prices up. Lately, though, numerous Fed officials have pounded the pavement to discuss the central bank's future course of monetary policy, and as it becomes increasingly clear that the Fed plans to start pulling back on its extraordinary actions of the past several years, investors can't get comfortable with the potential impact on their investments. As of 10:45 a.m. EDT, the Dow Jones Industrials have fallen 71 points, while broader market measures ae down even more sharply on a percentage basis.

Some of the declines in the Dow are earnings-related: Highflier Disney has dropped 2.7% following last night's disappointing report. But elsewhere in the Dow, cross-currents were more evident. Investors appear to be pulling back from some of the strongest success stories of the past year, perhaps simply taking profits without necessarily changing their views on company fundamentals. For instance, Home Depot has dropped 1.7% despite conflicting evidence about whether the recent spike in interest rates has really had any negative effect on the housing market. Moreover, Home Depot has dealt well with poor conditions in the housing market for years, and even a pause in the double-digit percentage rise in home prices wouldn't necessarily hurt the home improvement retailer's prospects in connecting well with both professional builders and do-it-yourself home-owners.

Similarly, Bank of America is down 2.2% as new sources of potential legal liability weighing on the long-beleaguered bank stock. Yet although the newest actions have some subtle differences from past lawsuits, B of A investors shouldn't be all that surprised by them. Moreover, interest rate increases have mixed implications for the bank's earnings, with some positive potential effects from interest margins offsetting reduced mortgage activity. Considering that the stock has nearly doubled since this time last year, today's drop is inconsequential for B of A shareholders.

On the other side of the spectrum, strength in some pockets of the Dow points to the long-term irrelevance of Fed policy. Cisco Systems has risen 0.3% this morning as it prepares for its earnings report next week, and with huge cash balances on its balance sheet, the tech giant certainly doesn't have to worry about interest rate policy. As technological innovation continues to play a vital role in economic growth, Cisco has positioned itself in important areas like enterprise communication and its core networking business while also expanding its reach into other tech subsectors. Those moves definitely carry risk, but they show Cisco's acceptance of the new reality in technology and in the business environment more broadly.

In the end, the Fed's moves won't change the prospects of the strongest stocks in the Dow. Make sure you know which companies to focus on by reading The Motley Fool's newly updated special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

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Fool contributor Dan Caplinger owns warrants on Bank of America. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Bank of America, Cisco Systems, and Home Depot. The Motley Fool owns shares of Bank of America. 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