Flight to Yield After the Fed Statement Pushes Dow Jones Higher Today

Dividend-paying stocks, as well as the bond market, moved higher as the Fed announced no change going forward.

Jun 18, 2014 at 4:39PM

The Federal Reserve Open Market Committee released its statement at 2 p.m today, announcing it was continuing with its taper, as expected, and still expects interest rates to start rising in mid-2015. Immediately, the Dow Jones Industrial Average (DJINDICES:^DJI) and S&P 500 (SNPINDEX:^GSPC) jumped on the news, with the highest gains coming from dividend stocks. The Dow finished the day up nearly 100 points, to 16,906. The S&P 500 was up 15 points, to 1,956.

The Federal Reserve's Statement was basically unchanged from April's. The Fed announced that it was cutting its long-term asset purchases from $45 billion a month to $35 billion a month. The one thing the Fed did change was its expectations for growth this year. In line with the World Bank and International Monetary Fund's forecasts the past few weeks, the Fed cut its expectations for growth to 2.1% to 2.3% for the year, but left expectations for 2015 and 2016 unchanged.

With growth slow, but steady, and the Fed keeping interest rates at all-time lows, today's biggest gainers were dividend stocks. The S&P 500 was led higher by the utilities sector, which rose 1.9% on the day, 0.9% higher than any other sector. Also notably, the VIX dropped 7% immediately after the statement, indicating that traders expect there to be little volatility during the coming month.


Source: Finviz.com

With the Fed keeping interest rates at all-time lows, savers and yield-hungry investors are paying high prices and taking on more risk to earn little extra reward. Investors taking more risk is what the Federal Reserve has been hoping for, though the Fed was really hoping that investors would invest in the real economy rather than just in the markets. This has not been the case, however, as companies and investors continue to plow money into stocks at high prices rather than investing in productive goods.

In the press conference following the release of the statement, Federal Reserve Chairwoman Janet Yellen warned of "over-complacency" in the markets. While I have argued that the stock market is overvalued, the "over-complacency" that Janet Yellen is worried about can best be seen in the bond market, especially the high-yield corporate bond market. High-yield bonds are those issued by companies with the weakest balance sheets or the weakest businesses. As such, investors demand a higher yield from them to compensate for the risk.

Currently, though, investors aren't asking for much extra yield from high-yield bonds. The high-yield bond market is trading at its lowest spread versus treasuries since 2006, at a spread of just 3.39%.


Investors are taking on extra risk across the market with little reward expected. Source: St. Louis Fed.

Bottom Line
Macro themes don't generally change much from day to day, so I'll end with my usual reminder: Try to stay sober while everyone around you is drunk on Fed-stimulus punch, telling you to join in on the fun. Keep learning, focus on your goals, have an investing plan, stick to it, and ignore the crowds.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers