Seven days from now, Americans across the country will elect government officials to represent them in the U.S. Congress and in their respective states. The following day, the Federal Reserve will issue its latest statement regarding the Fed’s monetary-policy plans for the months ahead.
Recent election polls indicate that members of the Republican Party will take control of the House of Representatives and gain seats in the Senate.
Meanwhile, most stock-market participants and economists expect the Federal Reserve to announce on Nov. 3 that it will soon begin a new wave of quantitative easing – that it will increase the amount of money that banks can lend by purchasing large amounts of U.S. government securities.
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As a result of those expectations, stock prices trended higher during the past eight weeks, with the Dow Jones Industrial Average rising 1139 points (11.5 percent) and the S&P 500 Index advancing 13 percent from Sept. 1 to Oct. 25.
Although some stock-market participants expect stocks to continue to rally during the weeks ahead, my experience suggests that stocks might pull back substantially following the outcome of the midterm elections and the Federal Reserve’s announcement on its monetary policy. That’s because investors have likely already factored those factors into the market.
If the Fed doesn’t give a clear indication of the amount of government securities that it might purchase during the months ahead, or if it indicates that it will purchase a lesser amount of those securities than current stock-market participants expect, there’s a good chance that stocks will fall sharply during the week ending Nov. 5.
I therefore urge you to not get too excited about the recent advances in stock prices.
Note from Moneynews:
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