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June 2 2016

Everyone makes mistakes. Some people learn from them.

In GMO’s March 2016 white paper, James Montier and Philip Pilkington continued to explore the Federal Reserve’s influence on the stock market. It was a process they’d begun in 2015 as they sought “…to understand why our forecast for the S&P 500 had been too pessimistic over the last two decades or so.” Inspired by research done at the New York Federal Reserve, they found:

“…sometime around 1985 the market really started to react to FOMC [Federal Open Market Committee] days. Like the Fed economists, we found that for the past 30 or so years these announcement days have had a major, and increasing, impact on the stock market…In fact, FOMC days account for 25 percent of the total real returns we have witnessed since 1984!”

Upon further examination, they realized the Fed’s influence on the Standard & Poor’s 500 Index (S&P 500) wasn’t caused by monetary policy decisions. Markets moved just because the committee was meeting. Investor sentiment was driving market action.

Last week, Federal Reserve Chair Janet Yellen commented, “It’s appropriate, and I’ve said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate.” Her comments did not inspire ‘animal spirits,’ which is how economist John Maynard Keynes described the emotions that motivate people to act.

At the end of the week, the Dow Jones Industrial Average and the S&P 500 were higher on solid economic data that included an upward revision of first quarter’s gross domestic product (GDP) growth rate. GDP is the value of all goods and services produced in the United States during a given period.

The next FOMC meeting is June 14-15.

Sources:
https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-stock-market-as-monetary-policy-junkie-quantifying-the-fed’s-impact-on-the-s-p-500.pdf?sfvrsn=3
http://www.cnbc.com/2016/05/27/yellen-rate-hike-probably-appropriate-in-the-coming-months.html
http://www.investopedia.com/terms/a/animal-spirits.asp?layout=infini&v=5D&orig=1&adtest=5D
http://www.barrons.com/articles/stocks-surge-over-2-on-strong-economic-data-1464409117?mod=BOL_hp_we_columns
http://www.reuters.com/article/us-usa-economy-idUSKCN0YI1JQ
http://www.nytimes.com/2016/05/29/business/top-ceo-pay-fell-yes-fell-in-2015.html?ref=business&_r=0

  • Data as of 5/31/161-WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)0.0230.027-0.0120.0810.0950.052
  • Dow Jones Global ex-U.S.2.1-0.7-13.8-1.7-1.6-0.3
  • 10-year Treasury Note (Yield Only)1.9NA2.12.13.15.1
  • Gold (per ounce)-314.52.6-4-4.56.3
  • Bloomberg Commodity Index0.78.8-14.5-14-12.4-7.1
  • DJ Equity All REIT Total Return Index26.6108.410.77.3

*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of the bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment.

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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