Thursday, October 29, 2015

Markets still depend on Fed’s policies

Some two months ago we wrote about the potential that US stocks could correct downwards, and touched upon the impact of the Federal Reserve’s interest rate policy on the market’s value. It has since become clear that the correction of the stock market did materialize – the Dow Jones Industrial Average index dropped by almost 11% in the second half of August. The hopes for continued easy interest rate policy then supported the market which however has not yet recouped all of the corrective drop.

Yesterday was another display of how the US stock market depends on the continuation of the Fed’s easy monetary policy. Before the Fed made its announcement, the markets were growing in anticipation of a delay of the rate hike. When the Fed issued their statement that it would keep interest rates unchanged, but downplayed global economic problems compared to its earlier statements and indicated that it may raise interest rates at its next meeting in December, the DowJones Industrial Average (an important stock market index in the US) plunged by almost 1% over the course of 15 minutes.
Why would the stock market drop when economic conditions improve? Apparently, the stock market still benefits more from the abundant liquidity provided by the Fed through easy money (ie low interest rates) rather than from fundamental economic factors which has been the case for seven years now. That said, in took about 1 hour for the market to regain much of the lost territory after that.  This further demonstrates that with the Fed balancing its approach to raising rates, confusion and uncertainty for the markets is created.  December is the last chance for the Fed to raise interest rates in 2015, so watch for continued market uncertainty heading into the close of the year.

Ukrainian Credit Union Limited

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