The market is tumbling sharply today, thanks to disappointing manufacturing numbers from Asia and because of the decision made by the Fed to buy up bonds in hopes of helping to revive what it sees as a struggling recovery.

Before this, our portfolio was doing quite well (the table below shows the closing numbers from last night). Now they’re each down a few points from yesterday.

That includes CARBO Ceramics (NYSE: CRR), which hit its sell stop for a gain of 11% (option traders already booked 100% and 20%). Sell your shares if you haven’t already.

The reason the Fed’s decision is causing so much trouble is that it’s symbolic of a shift in Fed policy.

During the crisis, the Fed bought about $2.3 trillion in troubled mortgage bonds. This sucked the risk out of the market, allowing the large and solvent U.S. government to hold these bonds to maturity. The mortgage bonds weren’t actually that risky, but any risk wasn’t an option.

Now that the bonds are maturing (or being prepaid) and the Fed is receiving cash, they‘ve decided to use that cash to buy up Treasury bonds to support the fledgling recovery.

So instead of reducing the balance sheet and tightening the money supply, the Fed has chosen to continue holding debt and carry on the era of free money.

What this does mean, however, is that today’s decline is likely a correction to take this new information into account and won’t last long. The market has adjusted its risk premium – which explains why all asset classes have declined today, aside from those seen as a “flight to safety” like Treasuries and the U.S. dollar – and will behave more normally from here.

At least that’s my prediction.

After all, corporate earnings remain strong. Looking only at the companies in the S&P 500, 427 have reported so far. Of those…

• 76% surprised on earnings per share
• 61% surprised on sales numbers
• 71% reported positive earnings growth over last year
• 76% reported positive sales growth over last year
• Total earnings per share were up 52% over last year

That still looks like recovery to me.

Another interesting piece comes from David Leonhardt at The New York Times. He dug deep into the unemployment numbers and found some interesting facts:

“One of the distinctive features of the Great Recession has been the enormous number of people who have been out of work for months on end. Almost 45% of today’s unemployed workers have been without a job for at least 27 weeks. In no other downturn since World War II did the share exceed 26%…

“Unemployment has been concentrated among a surprisingly small number of people, given how deep the recession has been. The nation’s pool of jobless workers has not been constantly changing. Instead, it’s been relatively stable – mostly because the hiring rate of new workers plunged in 2008 and still has not recovered. The drop in hiring has actually been steeper than the rise in layoffs.”

Leonhardt’s basically claiming that college educated workers (who have only seen an unemployment rate of 4.3%) and those who kept their jobs seem to be doing fine. But there’s a large, static pool of workers that lost their jobs and simply can’t find another one.

Clearly, we don’t want to just cast those that are unemployed aside, but when discussing the recovery this would suggest that the economy is in better shape than we had expected.

No recovery is perfect. And this one certainly has some warts. But there’s nothing to suggest that the classic post-earnings drift will falter in the coming months.

I’m continuing to troll the earnings reports and should have a new pick before long.

Ahead of the tape,

Matthew Weinschenk