What a Yellen Fed Means For Stocks

Janet Yellen will take charge of the Fed at a critical juncture.

Jan 7, 2014 at 10:15AM


Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

One of the coldest Arctic outbreaks in two decades is bringing record low temperatures to the East, the South, and the Midwest, but investors' risk appetite isn't frozen, as stocks opened higher this morning. The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) are up 0.61% and 0.72%, respectively, at 10:15 a.m. EST.

Perhaps one of the news items that is stoking the market's gains today is Monday's Senate confirmation vote of Janet Yellen to succeed Ben Bernanke at the head of the Federal Reserve, beginning on Feb. 1. The final tally of 56-26 (some senators were not in Washington for the vote due to the inclement weather) shows tepid support for Yellen -- by comparison, Bernanke's 2010 reappointment was controversial, but it was approved with a 70-30 vote. However, that matters little now that the Fed chair is hers.

Yellen takes this post at an exceptionally delicate juncture. The appointment of a woman is a historic milestone, but the Fed hit another milestone in December as its balance sheet topped $4 trillion in assets (more than those of JPMorgan Chase and Wells Fargo combined), having more than quadrupled in size since the start of the financial crisis. Yes, the central bank decided in December to taper its monthly bond purchases to $75 billion starting this month, but that amounts to lifting the foot from the accelerator, to use Bernanke's own analogy -- the Fed's balance sheet will continue to expand for some time yet.

Weaning financial markets off the stimulus it has provided could prove tricky -- while never failing to project confidence and authority, central bankers admit that they are in uncharted territory. Whether or not it is accurate -- and I suspect it is -- many professional investors believe the Fed's emergency measures, including three rounds of bond-buying and five-plus years of zero interest rates, have been a key driver of the spectacular bull market that has lifted the S&P 500 170% from its March 2009 low (not to mention the spectacular overvaluation in government bonds). That perception alone fosters a risk of withdrawal symptoms as the Fed takes a less interventionist role in markets.

In that context, what can we expect from Yellen? On the whole, continuity with Bernanke's regime; we know that Yellen, as Fed vice chairwoman, has championed asset purchases and a more open communication policy. She is also reported to be willing to tolerate inflation that is moderately above the Fed's 2% target in order to fight unemployment. That is enough to have her labeled a "dove" in the financial media, but my research suggests she is a pragmatic policymaker.

By and large, Bernanke did a first-rate job combating the crisis and its aftermath, but he leaves Yellen with some very heavy lifting. Even barring any major missteps from the Yellen Fed, I would suggest last year's stock market performance was partially borrowed from future returns. Anyone expecting a repeat performance (or anything near it) ought to take the rose-tinted glasses off; the potential for some genuine volatility in 2014 -- not just the kind that goes up -- looks excellent.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers