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The Fed’s Long-Awaited Decision to Raise Rates Sent SPY Soaring

Renee Blakely - Author
By

Dec. 17 2015, Published 12:06 p.m. ET

SPY jumped 1.5%

The SPDR S&P 500 ETF (SPY) and the Direxion Daily S&P 500 Bull 3X ETF (SPXL) rose 1.5% and 4.3%, respectively, on December 16, 2015, as Federal Reserve members concluded their two-day meeting about the interest rate direction.

The Fed raised its short-term interest rate target in the range of 0.25%–0.50%, meeting the expectations of the market participants. The rise in the interest rate is slight, and US equities were unperturbed by the rate hike, affirming their confidence in the US economy.

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Moreover, as stated by the Federal Reserve’s chairperson Janet Yellen, the pace of future rate hikes will be gradual and based on the strength of the economic indicators that would be released going forward. This statement reassured US investors regarding concerns of capital flight from stock markets to bond markets.

Market snapshot

The above graph illustrates the responses of the various market aspects to the Fed’s rate hike decision.

Here, the US dollar is represented by the PowerShares DB US Dollar Bullish ETF (UUP), oil is represented by the United States Oil ETF (USO), and gold is represented by the SPDR Gold Trust ETF (GLD). The treasury bond market is represented by the iShares 20+ Year Treasury Bond ETF (TLT), while volatility is represented by the Volatility S&P 500 Index (^VIX).

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US equities represented by SPY and SPXL rose as the Fed’s rate liftoff decision came in as per market expectations. Oil fell due to the supply glut that will be explained in the next part of this series. The US dollar was stable before the FOMC’s (Federal Open Market Committee) announcement, but it underwent a bumpy ride once the Fed’s statement was out. At market close, the US dollar emerged with no change.

The yields on bonds, both treasury and corporate, rose. Yields and bond prices move inversely. All base metals and precious metals rose on December 16, and so did their respective mining companies. Stocks of Newmont Mining (NEM), Freeport-McMoran (FCX), and Alcoa (AA) advanced 3.7%, 2.6%, and 1.3%, respectively, on the day.

Volatility in the stock market fell steeply as the FOMC’s meeting outcome fell in-line with investors’ expectations.

Let’s look at the performances of the component sectors of SPY on December 16.

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