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The Fed Breaks Its Rate Status Quo: What Investors Should Know

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Part 2
The Fed Breaks Its Rate Status Quo: What Investors Should Know PART 2 OF 5

Immediate Impact of Fed’s Decision: Market Down, Volatility Up

Impact of the Fed’s decision on the market

After the FOMC (Federal Open Market Committee) declared that it had raised the key interest rate for the first time in 2016, the market reacted calmly.

However, major US indexes (IVV) such as the S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq Composite fell marginally. SPY fell 0.81%, DIA fell 0.60%, and the Nasdaq Composite fell 0.50%, closing on negative notes.

Immediate Impact of Fed’s Decision: Market Down, Volatility Up

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The market has been showing strength since Republican presidential candidate Donald Trump won the presidential election over Democratic presidential candidate Hillary Clinton. The market rally has mainly been driven by optimism about the US economy. Billionaire investor and chair and CEO of the Duquesne Family Office, Stanley Druckenmiller, said that he’s optimistic about the economy after the election.

Major indexes showed some weakness ahead of the Fed’s decision. After the Fed’s announcement of its decision, we didn’t see any major changes in the various indexes, as the announcement met market expectations.

Volatility up

The CBOE Volatility S&P 500 Index (VIX), which measures the volatility in the S&P 500 Index, rose 3.7% on December 14, 2016. 

In August 2015, the devaluation of the Chinese yuan (YINN) (MCHI) spooked the market. VIX rose 143% during the yuan’s devaluation. During the Brexit vote, the volatility index rose nearly 56% on June 23–24, 2016. This shows how major events increased the volatility in SPY.

In the next part of this series, we’ll analyze the movement of the US Dollar Index.

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