Market Update from Frazier Allen, June 23rd, 2013

Clarksville, TN – Equities across the globe fell sharply after Federal Reserve Chairman Ben Bernanke implied that the central bank may start to wind down its asset purchases later this year if the economy continues to improve. The three major domestic indices took a hit, and the CBOE Volatility Index spiked to a new high this year.

The statement triggered a selloff on Wednesday and Thursday, as markets reacted to the prospect of higher interest rates. Many market observers already had forecast when this third round of quantitative easing would dial down, but the markets responded regardless.

Raymond James Chief Economist Scott Brown noted in recent commentary that there was no appreciable increase in long-term interest rates at the end of QE1 and QE2. “A change in total asset purchases of $500 billion would be equivalent to about a 20-basis-point change in the 10-year Treasury yield,” he wrote. “The decision to reduce the pace of purchases now or somewhat later shouldn’t have a major impact on yields. … A full stop in the Fed’s asset purchase program would not be a tightening of monetary policy. That will come when the Fed begins to reduce the size of its balance sheet.”

The market’s reaction, though, wasn’t unprecedented. The bond market took a similar tumble after Bernanke floated the idea in a speech in May. This time, European and Asian equity, bond and commodity markets also fell after Bernanke’s comments.

On a positive note, existing home sales jumped to its highest level in three and a half years, according to the National Association of Realtors. Many, like me, will continue to keep an eye out for additional improvements in economic data that could prompt Fed action.

Please call me if you want to discuss the markets, your portfolio or your overall financial plan in light of recent developments. I look forward to hearing from you.