Markets React Favorably to Janet Yellen Comments

Market Digest – Week Ending 11/15

In Senate confirmation hearings, Fed Chairwoman nominee Janet Yellen said, “It is imperative that we do what we can to promote a very strong recovery. It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero.”  In other words, she will continue to buy large quantities of bonds. This has the impact of keeping interest rates low, which makes other assets such as stocks more attractive. Stocks and bonds rose for the week.

Weekly Returns:

S&P 500: 1,798 (+1.6%)
FTSE All-World ex-US: (+1.5%)
US 10 Year Treasury Yield: 2.71% (-0.04%)
Gold: $1,288 (+0.0%)
USD/EUR: $1.349 (+1.0%)

Major Events:   

  • Monday – Amazon and the US Postal service announced the USPS will begin delivering packages in metropolitan Los Angeles and New York on Sundays. The service is expected to expand to other areas over time.
  • Tuesday – The IEA said the US will pass Russia and Saudi Arabia to become the world’s largest oil producer by 2016, though it is only expected to remain so until 2020.
  • Thursday – Presumed Fed Chairwoman Janet Yellen said she would continue with unprecedented monetary stimulus until she sees a robust recovery.
  • Thursday – 23 year old Snapchat CEO Evan Spiegel reportedly rejected a $3 billion takeover offer from Facebook.
  • Friday – Bill Ackman’s hedge fund took large stakes in Fannie Mae and Freddie Mac, joining Fairholme Capital in efforts to privatize the mortgage lending giants.

Our Take:

Everyone expects Janet Yellen to pick up where Ben Bernanke left off by providing massive monetary stimulus in an attempt to stimulate economic growth, job creation and asset prices. There is no way to tell exactly what Yellen will do until she is on the job, but this week she strongly indicated these expectations will be met.

Like any Fed Chair, Yellen will have to manage not just policy, but how she communicates and shapes expectations. For now, stock markets like what they hear. This week’s gains can be largely attributed to her comments. But she has now set a high bar that could open the door for disappointment when and if bond purchasing must be slowed.


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