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What a Dovish Fed Means for Stocks

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After the recent Fed news, investors may want to review their exposure to these two market segments.

Investors have spent much of the last couple of months fixated on the Federal Reserve (the Fed). In the end, last Thursday, the central bank did exactly what most had come to expect: nothing.

After a day to deliberate how to interpret the Fed’s decision to hold off on raising interest rates, investors took the Fed’s hesitancy as a sign of global economic fragility. Stocks reversed course on Friday, giving up their gains for the week, and market volatility (as measured by the VIX index) quickly spiked back to above average levels after dropping below 20 early in the week, according to data accessible via Bloomberg.

What a Dovish Fed Means for Stocks

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Market Realist – What does a dovish Fed means for stocks?

In the recent meeting, the FOMC (Federal Open Market Committee) announced its decision to leave the federal funds rate unchanged at 0%–0.25%. The dovish Fed pointed out that the “uncertainties abroad” made it risky to raise the policy rate. However, we’re likely to see a rate hike by the end of the year.

The dot plot above shows every FOMC member’s view on interest rates. Three members think interest rates will be unchanged for the rest of the year, while one member thinks interest rates will slip to negative by the end of the year.

However, 13 out of 17 members still think rates should rise by the end of the year. But the Fed is slightly more dovish now compared to June, when 15 members thought rates would move up by the end of the year.

The S&P 500 (VOO) (IVV) fell by 1.6% after the news, while the yield on ten-year Treasuries (IEF) fell by 17 basis points, from 2.3% to 2.13%. The Fed’s move to keep rates unchanged due to global economic fragility was unusual. This shook investor confidence and led to the dip in the stock markets.

[marketrealist-chart id=686694]

After being low for most of this decade, volatility (VXX)(VIXY) spiked in late August, triggered by the slowdown in China (MCHI). The volatility index has remained high since. We’re likely to see heightened volatility in stocks for a variety of reasons, including high valuations. However, the delay in the rate hike means that you could enter a couple of market sectors that appear interesting now. Read on to find out which ones.

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