FOMC Minutes Dampen Index ETF Rally

Index ETFs fell slightly today, likely in reaction to the disappointing Fed FOMC minutes, which indicated that the Fed is “out of bullets” and that bond buying could stop by the end of the year.

Accordingly, the SPDR S&P 500 ETF (SPY) lost .22%, the SPDR Dow Jones Industrial Average ETF (DIA) lost .1%, the PowerShares QQQ Trust Series 1 ETF (QQQ) declined .5%, and the Russell 2000 Index ETF (IWM) lost .23%. Keep in mind that the Russell 2000 Index reached an all time intra-day high of 872.28, so the Fed’s moves certainly pushed the Russell 2000 and the (IWM) ETF back on its heals a little bit.

So, trading day number two of lucky 2013 has come and gone, and so far we have seen an enormous rally yesterday surrounding the “resolved” fiscal cliff, and then a slight decline today after investors finally realized that the Fed is “running out of bullets.”

Market action appears flawed to me, because markets should have dropped yesterday, considering just how little the Fiscal Cliff Deal accomplished and how much is left to fight about in the next few months (sequestration, debt ceiling debates, etc). Then, markets should have dropped even more today after the Fed revealed that yes, indeed the Fed is running out of bullets, and that yes, indeed, easing might stop before the end of this year.

Perhaps investors are banking on the economy improving largely, or that Congress will actually compromise again. Either way, all of this stuff (too much debt, not enough growth) will likely come to a head someday, and markets do not seem to believe that theory just yet.

In addition, the jobs data released today was not the best (nor the worst), with the ADP Employment Report suggesting that 215,000 new jobs were added to the economy in December, while unemployment claims jumped by a figure of 10,000 from the previous week. Of course, tomorrow is a huge day as the nonfarm payrolls report is scheduled for release and the results of this report have the potential to further sway markets one direction or the other.

Bottom Line: Markets were too happy over the fiscal cliff “resolution” and not angry enough over the Fed’s proposed monetary policy. With major Congressional fighting due ahead, day two of lucky 2013 was likely just a blip on the map.

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