Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What a Yellen Fed Means For Stocks

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.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2785805, ~/Articles/ArticleHandler.aspx, 9/5/2015 2:14:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:30 PM
^DJI $16102.38 Down -272.38 -1.66%