Even addicts know they can't keep overdosing without doing themselves horrible harm.
And that's how investors responded Wednesday when they learned from the Federal Reserve that they eventually are going to have to kick the habit of relying on the Fed's massive stimulus for the economy and stock market. Instead of running from stocks, as some feared investors would do when the Fed hinted at a withdrawal, investors bought stocks with gusto — sending the Dow Jones industrial average up 292.71 points.
It wasn't that investors welcomed an end to the stimulus that has helped drive the Standard & Poor's 500 up 48 percent in two years. Rather, it was that investors knew the day would come when the Fed would start cutting them off, and they were relieved to hear that it's starting gently. No one is going to have to go cold turkey.
The Federal Reserve will buy $75 billion in mortgage securities and Treasury bonds each month. That is a lot of inducement to keep interest rates low — conditions that stock investors like because businesses and homebuyers can borrow cheaply.
Fed Chairman Ben Bernanke is still worried about unemployment. But he thinks that the aggressive stimulus is working — not as much as he hoped, but slowly and surely. That was the other part of Bernanke's message that pacified investors and sent them to their computers to buy stocks. If Bernanke had hinted that the economy wasn't coming around, investors probably would have quickly sold stocks.
But now investors can buy stocks, at least for a while, based on the fact that the Fed, in effect, will keep offering methadone as the economy strengthens. That doesn't mean that there won't be repercussions for investors. They've already suffered since the Fed started hinting last spring that they couldn't count on their drugs forever. Since then, investors in the iShares 20+ Year Treasury Bond exchange traded fund have lost about 18 percent.
The threat of higher interest rates makes low-interest bonds less valuable now.
There also have been losses in the market involving the stocks that people bought to get income while the Fed was keeping interest rates unbearably low on bonds.
If the economy continues to gain strength, investors may actually buy stocks because they expect companies to be increasingly profitable, and not just because the Fed's infusions are giving investors a temporary high.