The Markets
After a level of hype that would have exhausted even the most dedicated Star Wars fans, the Federal Reserve finally began to tighten monetary policy last week, raising the funds rate from 0.25 percent to 0.50 percent.
Although financial markets appeared sanguine when the rate hike was announced, the calm dissipated quickly. The Standard & Poor's 500, Dow Jones Industrial, and NASDAQ indices finished the week lower. International markets fared better. Most finished the week higher.
The last five times the Fed has begun to raise rates, the U.S. dollar has remained stable and stock prices have risen, on average, in the months immediately following the hike, according to The Economist.
While tightening monetary policy (and talk of tightening monetary policy) often affects financial markets immediately, economic change happens at a more measured pace. The Economist explained:
"The impact of changes in interest rates is not usually felt on announcement...The response of the real economy also comes with a delay. Most reckon it takes time for monetary policy to shift spending habits, and one rate rise is more an easing of the accelerator than a U-turn. Unemployment continued to fall in each of the past five tightening episodes. That will probably happen again...The most uncertain variable is inflation. This fell rapidly following rate rises in 1983 and 1988 as the Fed established its hawkish credentials. Yet in 2016, the most likely direction for inflation is up (the rate rise is aimed at restraining its ascent)."
Another factor affecting the U.S. and global economies is the price of oil. Last week, The Wall Street Journal reported oil prices declined to a new six-year low. Falling oil prices have contributed to deflationary pressures in Europe, stunting the region's economic recovery. They have had a mixed affect on the U.S. economy, helping consumers and hurting the energy industry.
Data as of 12/18/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.3%
|
-2.6%
|
-2.7%
|
11.5%
|
10.0%
|
4.8%
|
Dow Jones Global ex-U.S.
|
0.4
|
-8.0
|
-7.6
|
-0.4
|
-0.8
|
0.5
|
10-year Treasury Note (Yield Only)
|
2.2
|
NA
|
2.2
|
1.8
|
3.4
|
4.4
|
Gold (per ounce)
|
-0.9
|
-11.4
|
-11.4
|
-14.4
|
-5.1
|
7.6
|
Bloomberg Commodity Index
|
-1.2
|
-25.8
|
-28.6
|
-18.0
|
-13.2
|
-7.8
|
DJ Equity All REIT Total Return Index
|
1.6
|
0.6
|
0.8
|
10.3
|
11.9
|
7.2
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
|