It has been a painful two days for investors. Stocks, bonds, and commodities all tumbled after the Federal Reserve suggested the U.S. economy was nearly healthy enough for the central bank to provide less support.
But the big question remains: What will happen to your 401(k) and other investments?
Even though the Fed move theoretically means market fundamentals will rise in importance, the sell-off shows the process is going to be a tricky one for traders and investors to navigate as they encounter economic data likely to give off contradictory signals.
Many expect wild swings in the coming months as the market adjusts to this new reality. Investors are likely to worry that surprisingly strong economic figures will hasten the Fed's exit from markets - ironically putting the market in the position of rooting for good-but-not-great economic figures.
"The market has had its safety blanket taken away," said Chris Wyllie, chief investment officer at wealth manager Iveagh in London.
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The safety blanket is the Fed's bond-buying program, known as quantitative easing. The plan has lifted both the U.S. economy and world financial markets by pushing interest rates to historic lows. But comments by Fed Chairman Ben Bernanke on Wednesday, when he laid out a likely end to the program by next year if the economy strengthens further, brought a dose of finality to the markets.
Andrew Szczurowski, a portfolio manager at Eaton Vance in Boston, said he viewed the U.S. economy as a person lost at sea to whom Bernanke had thrown a life vest.
"And now all of a sudden Bernanke is talking about poking a hole in the life vest, perhaps before the stranded person is able to swim to shore, and we are seeing essentially every market in the world react negatively to this," he said.
All this market turmoil has some investors afraid that the era of easy money will go away, further hammering U.S. credit markets. Most analysts, however, expected this sell-off. The market was ripe for a pullback after having climbed nearly 16 percent before the selling hit on Wednesday.
"I do think this is the beginning of a long-term trend in rising rates," said Ward McCarthy, Jefferies chief financial economist. "But I don't think this is the beginning of a longer-term trend of a decline in stocks. I think stocks will stabilize. Eventually, you're going to start to see a rotation out of fixed income into stocks, and stocks will rise."
McCarthy is not alone in his assessment.
"We haven't had a meaningful correction in the market and if this sell-off continues …it doesn't mean the market is going to collapse; it is essentially recalibrating — the road to normal is going to be filled with detours."
U.S. stocks fell 2.5 percent on Thursday, and over the past two days both the Dow Jones Industrial Average and S&P 500 erased all their gains for May and June.
Gold fell 7 percent on Thursday, falling below $1,300 an ounce for the first time since September 2010, and oil dropped 3.5 percent.
Bond yields rose to 2.469 percent, hitting its highest level since August 2011, which means borrowing--whether for a house or car--could get more expensive.
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“What you’re witnessing right now is some of the trading money in the market and speculative money moving out and there’s some repricing going on. If this sell-off continues, you will see buyers coming in. This is the way markets are supposed to act,” said Quincy Krosby, market strategist at Prudential Financial.
On Wednesday, Bernanke laid out what could be the plan for how and when the central bank begins to pare its $85 billion in monthly purchases of U.S. government bonds and mortgage-backed securities.
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But that shouldn’t have been much of a surprise to market, Krosby said. “Bernanke had already mentioned this in his speech back in May and we saw an immediate reaction in the bond market," she said.
While the market may be anxious about the end of easy money, the Fed’s willingness to start cutting back on the monetary stimulus may be a sign that economic growth is improving.
“Overall, the Fed’s somewhat more favorable stance on the economy and the trajectory of the unemployment rate should be a positive for corporate earnings and stocks,” Wells Fargo Advisors’ chief macro strategist Gary Thayer wrote in a note.
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Other market participants agree. "I do think this is the beginning of a long-term trend in rising rates," said Ward McCarthy, Jefferies chief financial economist. "But I don't think this is the beginning of a longer-term trend of a decline in stocks. I think stocks will stabilize. Eventually, you're going to start to see a rotation out of fixed income into stocks, and stocks will rise."
He added, "My guess is this calms down … and then the importance of the economic data releases will become quite profound.”
Reuters contributed to this report.