The Dow Jones Industrial Average closed the week out on a weak note Friday as investors prepared for Janet Yellen to make a speech that could give clues as to when the Federal Reserve plans to raise interest rates. Today, we'll talk about why the Dow fell before the speech, what we saw in the speech, and what we can expect with regard to interest rates and the market moving forward.
Why The Dow Jones Industrial Average Fell Before The Speech
In the midst of the 2008 and 2009 financial disaster that took the world by storm, the Federal reserve enacted a couple of policy changes. One being a quantitative easing plan, the other being low interest rates. As a result, the bull started to run yet again, and the bull market that we've felt for several years now was created. One thing that we all knew when this started was that it couldn't last forever. As soon as the US economy could stand on its own two feet again, the Federal Reserve would start to remove the crutches it put in place. That has already happened. As a matter of fact, last year, the Federal reserve stopped the quantitative easing plan.
Now, the next big step in the recovery is for the Federal Reserve to start slowly raising interest rates back to normal. However, as soon as this happens, the easy money that is available in the market at the moment will disappear; ultimately forcing investors to rethink the levels of risk they're willing to deal with in their portfolios.
Janet Yellen's Speech
As expected, Janet Yellen took center stage in Rhode Island Friday to make a speech. Here's is a quote of the most important part of her message…
“Of course, the outlook for the economy, as always, is highly uncertain. I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so. For many reasons, output and job growth over the next few years could prove to be stronger and inflation higher, than I expect; correspondingly, employment could grow more slowly, and inflation could remain undesirably low.”
To me, this paragraph means two very big things…
- Janet Yellen Is Being As Truthful As Possible – When was the last time you heard an economist utter the words, “I don't know what's going to happen with the economy; we'll just have to see things play out.” Personally, I've never heard it; but what Yellen said is exactly that in a nutshell. She has absolutely no idea; so, there's no way to determine when the economy will be healthy enough for an interest rate hike.
- We're Most Likely Not Going To See A Hike Until The End Of The Year – If you look back to my articles from late 2014 and early 2015, I was certain that we would see an interest rate hike around June, 2015. However, I'm no longer sure that's the case. As a matter of fact, it doesn't seem to be the case at all. When I was making these predictions, Yellen had a very strong manner about her, she seemed certain with regard to what was going to happen and what we could expect. The Fed even stopped using the word “Patient” when talking about when rates would be increased; insinuating that the hike was likely to come soon. However, Friday's speech showed anything but certainty. So, while we're likely to see a rate hike by the end of the year, it's probably not going to happen in June.
What This Means For The Dow Jones Moving Forward
For the most part, it means that the Dow is free to continue it's bull run. The simple fact is that if there was any language in the conversation that insinuated that the Federal Reserve would be increasing interest rates soon, we would have seen a correction in the market as investors rethought their portfolios. However, that's not what happened. Instead, Janet Yellen made it clear that the Federal Reserve has a very uncertain outlook with regard to where the US economy is headed. That means that it's not yet ready to stand on its own two feet, and that the Federal Reserve is likely to keep rates low; at least until the final months of the year. So, the bulls will continue to run and we can expect the Dow to rally as the market opens next week!