What The Fed’s Decision Means For Investors
By Martin Tillier - Sep 18, 2015, 3:37 PM CDT
Yesterday’s conclusion of the Federal Open Market Committee (FOMC) meeting and the subsequent announcement and press conference was, if we were to believe the stories going in, supposed to bring some clarity as to the timing of a Fed rate hike that we have been told for about a year is coming soon. In a remarkable act of obfuscation, however, Janet Yellen et al actually managed to leave us more confused than we were before. The decision not to raise rates was accompanied by language that suggested it was still “coming soon,” leaving economists and analysts predicting next month, December and even next year as the definition of “soon.”
The market’s reaction was fascinating. As you would expect, both stocks and oil spiked immediately on the release of the word “unchanged.” That is almost inevitable in these days of computers programmed to respond to certain key words, but once the humans stepped in, the picture changed rapidly.
Within a minute or so of the announcement we were back to where we started and by the end of the day, in a spectacular example of “buy the rumor, sell the fact” we were actually trading lower on the day in both stocks and oil futures. In many ways, to those accustomed to markets, that is no surprise given those markets’ role as forward discount mechanisms.
They had accurately predicted the decision as both oil and equities had moved up for three successive days; moves made even more noteworthy when you consider that the run up to an…
Yesterday’s conclusion of the Federal Open Market Committee (FOMC) meeting and the subsequent announcement and press conference was, if we were to believe the stories going in, supposed to bring some clarity as to the timing of a Fed rate hike that we have been told for about a year is coming soon. In a remarkable act of obfuscation, however, Janet Yellen et al actually managed to leave us more confused than we were before. The decision not to raise rates was accompanied by language that suggested it was still “coming soon,” leaving economists and analysts predicting next month, December and even next year as the definition of “soon.”
The market’s reaction was fascinating. As you would expect, both stocks and oil spiked immediately on the release of the word “unchanged.” That is almost inevitable in these days of computers programmed to respond to certain key words, but once the humans stepped in, the picture changed rapidly.
Within a minute or so of the announcement we were back to where we started and by the end of the day, in a spectacular example of “buy the rumor, sell the fact” we were actually trading lower on the day in both stocks and oil futures. In many ways, to those accustomed to markets, that is no surprise given those markets’ role as forward discount mechanisms.
They had accurately predicted the decision as both oil and equities had moved up for three successive days; moves made even more noteworthy when you consider that the run up to an announcement of this magnitude is usually marked by a period of calm. Once the news was confirmed, therefore, some profit taking was to be expected.
As a trader and investor, not only am I not puzzled by this counterintuitive move, I am actually glad to see it. However you look at it, the prospect of a few more months of zero interest rates and the reiteration of the Fed’s determination to create some kind of inflationary environment has to be good for stocks and commodities in the short to medium term. The long term effects of promoting inflation could be a different story, but that is not the concern right now.
What the Fed has done is give the green light to investors when it comes to accumulating assets and the market has cooperated by allowing us to do so at a slight discount due to its internal dynamics. Continuing to accumulate stock in big name, multinational, integrated oil companies still looks like a decent play despite the fact that the Fed’s main concern was the global economic outlook. In fact, if you listened to Yellen it seems that the market reaction to such concerns was more the issue. Leaving aside the fact that the Fed really shouldn’t be paying too much attention to what traders are doing, in the short term that means that the Fed is not necessarily too worried about the actual economic conditions elsewhere.
For longer term investors, then, take the opportunity to buy the likes of Exxon Mobil (XOM) at below $75 and Chevron (CVX) at below $80. I am not discounting the possibility, or even likelihood, of some more volatility in the coming weeks given the sustained uncertainty, but with what must be good news for stocks and oil tracking a little higher, they are investments that will look good once everything has returned to “normal.”
