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When Yellen Speaks Stocks Fall

Janet Yellen, Chairperson of the U.S. Federal Reserve has spoken and U.S. stocks are lower. Speaking at the yearly Jackson Hole economic symposium sponsored by the Kansas City Federal Reserve Bank, Yellen said that the case for a rate increase has gotten stronger and then stocks headed down. The Wall Street Journal comments on Yellen’s remarks about interest rates.

The remarks, which had been anxiously awaited all week, sparked an initial reaction to sell stocks that quickly reversed itself. Later in the session, stocks again fell, as investors’ expectations for a rate rise later this year climbed. Treasury yields and the dollar also fluctuated before rising.

Loose U.S. monetary policy has been a driving force in financial markets, keeping the dollar soft and supporting stocks and bonds.

Will higher rates kill the current stock market rally? Despite the apparent fear and trepidation of the market, the Fed is likely to raise rates by another tenth or two tenths of a percent. A little historic perspective on interest rates is in order.

Effective Fed Funds Rate

It has been since before the 2008 market crash that the effective Federal Funds Rate was been anywhere but near zero. However, the Federal Funds Rate has been as high as 19.4% in July of 1981. Courtesy of the Federal Reserve Bank of St. Louis here is a chart showing the Effective Federal Funds Rate going back to 1955.

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.
The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.

The Federal Open Market Committee meets eight times a year and determines a federal funds target rates which it aims for by buying and selling government bonds. As the graph shows, the historic oddity is the fact that rates have been near zero for eight years! Although high interest rates can hurt the economy we are usually talking about the rates seen in the 1970s. The economy was doing fine in the late 1990s even though the Federal Funds rate was in the 5% range.

Winners and Losers, What and When to Buy

Utility stocks will take a hit on the threat of an interest rate rise as noted by Investor Place.

There’s no arguing that utility stocks have knocked it out of the park this year. Year to date, the Dow Jones Utility Average (DJU) is up better than 18%. Utility stocks are always attractive to income oriented investors because of their dividend yields. But is now the time to buy?

Probably not. In fact, I recently recommend taking profits in utility bellwether Southern Company (SO). But it looks like investors will get an opportunity relatively soon to pick up some high quality names in this dependable, dividend paying sector.

And there likely will be bargains to be had for those looking for secure retirement investments after these dividend stocks over-correct. Dividend stocks are normally considered an alternative to bonds but now days when interest rates are nearly zero dividend stocks are a better bet. Smart investors will wait for a slight correction and then add to their buy and hold portfolio. If rates go too high that could be another issue but look at the Federal Funds Rate graph for a little perspective.

When Yellen Speaks Stocks Fall PPT





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