Everyone makes mistakes. Some people learn from them.

In GMO’s March 2016 white paper, James Montier and Philip Pilkington continued to explore the Federal Reserve’s influence – The FED Effects – on the stock market. It was a process they’d begun in 2015 as they sought “…to understand why our forecast for the S&P 500 had been too pessimistic over the last two decades or so.” Inspired by research done at the New York Federal Reserve, they found:

“…sometime around 1985 the market really started to react to FOMC [Federal Open Market Committee] days. Like the Fed economists, we found that for the past 30 or so years these announcement days have had a major, and increasing, impact on the stock market…In fact, FOMC days account for 25 percent of the total real returns we have witnessed since 1984!”

Upon further examination, they realized the Fed’s influence on the Standard & Poor’s 500 Index (S&P 500) wasn’t caused by monetary policy decisions. Markets moved just because the committee was meeting. Investor sentiment was driving market action.

Last week, Federal Reserve Chair Janet Yellen commented, “It’s appropriate, and I’ve said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate.” Her comments did not inspire ‘animal spirits,’ which is how economist John Maynard Keynes described the emotions that motivate people to act.

At the end of the week, the Dow Jones Industrial Average and the S&P 500 were higher on solid economic data that included an upward revision of first quarter’s gross domestic product (GDP) growth rate. GDP is the value of all goods and services produced in the United States during a given period.

The next FOMC meeting is June 14-15.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* This newsletter was prepared by Peak Advisor Alliance of which DeYoe Wealth Management is a Member, and should not be construed as investment advice.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Stock investing involves risk including loss of principal.

* “The FED Effects Sentiment”

Sources:

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-stock-market-as-monetary-policy-junkie-quantifying-the-fed’s-impact-on-the-s-p-500.pdf?sfvrsn=3

http://www.cnbc.com/2016/05/27/yellen-rate-hike-probably-appropriate-in-the-coming-months.html

http://www.investopedia.com/terms/a/animal-spirits.asp?layout=infini&v=5D&orig=1&adtest=5D

http://www.barrons.com/articles/stocks-surge-over-2-on-strong-economic-data-1464409117?mod=BOL_hp_we_columns

http://www.reuters.com/article/us-usa-economy-idUSKCN0YI1JQ

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