The Fed’s Yellen plays Santa Claus for Wall Street
Washington (Dec 20) It was a week before Christmas Eve and the light from the first night’s Hanukkah candles had faded. But on Wall Street the mood was gloomy after stocks had had their worst week in three years.
Just when it looked as if the Grinch had swiped this holiday season, along came Federal Reserve Chair Janet Yellen bearing gifts for all the good little girls and boys.
Wednesday’s announcement by the rate-setting Federal Open Market Committee that it can be “patient” in deciding when to start raising interest rates again was followed by a press conference in which Yellen said the Fed would not raise rates until after “a couple of meetings” in 2015.
That could mean as early as April, but investors interpreted it to mean at least by June, and they proceeded to back up the truck and buy stocks.
The Dow Jones Industrial Average gained more than 700 points in three days and the S&P 500 Index rallied 5%. That’s almost, but not quite, back to where it was when the sell-off started nearly two weeks ago.
So, can this Santa Claus rally last?
I think so, at least into the New Year. As I wrote last week, ’tis the season for end-of-year rallies. This one arrived Dec. 17 — technically a week before it usually begins — but hey, who’s counting?
The causes are the same every year. From November on, big institutions and wealthy individuals unload their losing stocks to offset their gains and reduce their tax liabilities, particularly in good years like 2014. Opportunistic investors jump into the breach to buy up depressed shares and others that were collateral damage.
But when this triggers market rallies, big institutions like mutual funds pile on and buy the big winners, too, to show their shareholders they’re in the right stocks. They call that “window dressing.”
Also, this year, the markets initially sold off on extreme weakness in crude oil prices as investors feared that it signaled global economic weakness rather than a market-share grab by Saudi Arabia. But Brent crude appears to have stabilized for now above $60 a barrel. If it can stay there, the markets will view it as the best of both worlds.
The U.S. economy still looks strong — head and shoulders, in fact, above most other developed countries. But as GDP growth in Europe, Japan and even China weakens, we’ll find out whether we can continue to be an island of stability and growth.
In the meantime, investors should enjoy Yellen’s holiday gifts. The Fed’s track record as a great market timer — or market maker — remains intact.