Investors Overreact to the Federal Reserve's Statement

Stocks are dropping, with every major stock index in the US down over 2 percent today. The drop also moves stocks  into negative territory for the year.

Investors have become worried about the recovery thanks to a weaker outlook from the Federal Reserve yesterday, and softer Chinese factory data last night. Both reports have caused an increase in concern over the economic recovery.

The worries about global growth is causing the more cyclical sectors such as industrials, materials, and energy to get hit the hardest, while telecom stocks are holding up a bit better.

On Tuesday the Federal Reserve downgraded its outlook for the economy, which seems to have been a surprise for some investors. The statement by the Fed shows that the committee now has very low confidence in the health of the recovery. Given the state of the labor market, disappointment at the pace of recovery is understandable, but the Fed’s statement is just stating what has become obvious with the recent economic data releases in the last few weeks.

The Fed statement and the news from China does not uncover any new or unknown trends, We know that growth is slowing, but the global economy is still recovering. However, some investors are starting to think the Fed knows something the rest of us do not and are selling now.

In our opinion these investors are overreacting and reading too much into the Fed’s change in language.

As we have said before, investors would be wise to ignore the emotional day-to-day fluctuationsand keep focused on the facts, which still point to a slowly recovering global economy with many pockets of weakness.