Markets must now learn to operate in an environment absent the "Bernanke Put," a term describing the policy enacted by the Federal Reserve to provide downside protection for markets.
The first chart below is of Barclays TIPS Bond Fund
Investors were caught on the wrong side of the Fed last week as many thought inflation was too low to warrant decreasing stimulus. The pair below highlights that for much of the year markets have been fleeing inflation-protected securities.
Growth has remained gradual and general tepid data from all over the world have suppressed inflation.
Along with a selloff in Treasury Inflation-Protected Securities, gold has fallen. A stronger dollar has kept buyers out of the market for gold and commodities in general.
Although U.S. stimulus is coming to an end, economic data will have to improve vastly in the U.S. and all over the globe for investors to reenter to market for inflation-hedging assets.
The next pair is of Barclays 1-3 Year Treasury Bond Fund
An improving economy is also indicated by a steepening curve, but unlike most cases, this time inflation continues to fall.
Unless inflation and economic growth get stronger, long-term rates will begin to fall again.
It is likely markets overreacted to Bernanke's comments on Wednesday, and when the dust settles, markets could correct downward.
Expect the U.S. yield curve to flatten in the following weeks, especially if inflation expectations fail to begin their ascent.
The final pair is of SPDR Homebuilders ETF
When Bernanke began to target long-term rates and mortgage-backed securities in 2012 to spur investment, homebuilders stocks got a major boost. Declining mortgage rates and an improved labor market led to more housing demand.
With the recent rise in long-term rates, the pair below fell to yearly lows. Although the economy has improved, less government support is likely to weigh on the housing sector. If economic data fail to show considerable improvement and the labor market remains tepid, stocks tied to housing will remain weak.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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