After starting the month off with moderate gains, major ETFs yo-yoed up and down after the Federal Reserve refrained from taking on more economic stimulus following its two-day meeting. The Fed said it would keep short-term interest rates near zero until late 2014. But it reiterated its pledge to stimulate growth if the job market doesn't improve.
"In a bit of a surprise move, the Federal Open Market Committee decided to maintain the status quo," Ryan Sweet, senior economist at Moody's Analytics, said. "The Fed's statement shows policymakers are not pleased with the recovery and they downplayed some of the improvement in the housing market."
The odds of the Fed enacting QE3, or a third round of quantitative easing, in September are lower but that could change depending on Friday's nonfarm payroll employment report, Sweet added.
"A radical monetary initiative announced today might seem like an overreaction and a waste of increasingly scarce policy ammo if Friday's employment report isn't too weak," Ed Yardeni, president and chief investment strategist at Yardeni Research, wrote in his daily briefing.
The most important take-home message from the Fed's announcement was that it acknowledged the U.S. economy is growing slowly and that it's possible it will take on more stimulus if the data continue to weaken, said Jim Russell, chief equity strategist at U.S. Bank Wealth Management in Cincinnati.
The SPDR S&P 500 ( SPY ) ended the session down 0.11%.SPDR Dow Jones Industrial Average ( DIA ) lost 0.22%.PowerShares QQQ ( QQQ ), a basket of the 100 largest nonfinancial stocks on the Nasdaq, fell 0.29%.
More volatility can be expected following Thursday's announcement from the European Central Bank.
Paul Schatz, president of Woodbridge, Conn.-based Heritage Capital, says he has no doubts that the Fed will enact at least three more rounds of QE, popularly known as printing money. It's just not happening as fast as the market would like.
"Markets are like crack addicts that just want more and more and more without hesitating," Schatz said. "The data are not falling off the cliff. They are just mediocre. And this is what happens during post financial crisis recoveries."
Other market watchers say there isn't more the Fed could do because most of the U.S. economic problems are born out of the European debt crisis and looming fiscal cliff, which it has no control over. The fiscal cliff refers to the looming year-end choice before the government to let tax cuts expire and across-the-board spending cuts take effect or to increase the budget deficit and government debt beyond already record levels.
"The resolution of both these issues would be a boon to consumer confidence, the markets, and perhaps the economy," said Ethan Anderson, chief investment strategist at Rehmann. "In the meantime, it has put in adequate shock absorbers as demonstrated by economic and employment growth (albeit muted). If the situation gets worse, they will be prepared to do more, but for now the people that can have the most influence on the economy in the near term are the politicians."
What To Do With Your Money Now
The age of cheap money will reign for the foreseeable future, given that the Fed pledged to keep interest rates low through 2014. That may be a boon for homebuyers but torturous for banks and financial service providers, which will struggle to profit money from lending money.
"This is not the time to put new money to work with the banks and financial stocks, as they will continue to look cheap as their share prices decrease," said Ronald Lang, a principal at Atlas Wealth Management.
Lang recommends investing in dividend-paying ETFs such asSPDR S&P Dividend (SDY),Vanguard Dividend Appreciation (VIG),Vanguard High Dividend Yield Index (VYM), iShares S&P U.S. Preferred Stock Index (PFF) andPowerShares Financial Preferred (PGF).
He figures that so long as global economies continue to slow and Europe is in a recession, foreign investors will also likely seek out safety and income in U.S. dividend paying stocks and ETFs.
Follow Trang Ho on Twitter @TrangHoETFs .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.