August started out looking like it would be a tough month for the markets. Stocks were down widely due to quite a few international issues – Russia and Ukraine, Iraq, and Gaza and Israel. Overall, the S&P 500 (the index that tracks 500 of the largest companies on the US stock exchanges, and a commonly used measure of the US economy) had the biggest weekly decline in almost 2 years in the first week in August.
Luckily though, things look like they have turned around over the course of the month. Today the S&P 500 closed at 1,992 – the highest it’s ever closed. The Dow Jones Industrial Average was close to its all-time high as well.
The main reason for today’s impressive results was yesterday’s Fed meeting. While the economy was in recession the past few years, the US Federal Reserve kept interest rates low to spur economic recovery. Low interest rates spur spending, and thus economic growth, because it’s easier and cheaper to borrow money. So after the housing crash not only were you encouraged to buy a house and lock in low interest rates, but spending less on your mortgage interest payments means you can spend more in the marketplace.
Low interest rates are also good for the stock market because they encourage people to invest in stocks rather than bonds. If interest rates are low you get a lower return on your bond investments and thus stocks look like a more profitable investment (with inflation, bonds are about worthless right now). For the most part stock and bond investments have an inverse relationship.
Now that the economy is improving, people are worried that the Fed will hike interest rates back up, thus indirectly moving money out of the stock market. At the meeting yesterday though, the Fed indicated that they will continue to depress interest rates for the time being. This means the market gets to reap the benefits of good economic reports – i.e. fewer Americans than expected filed for unemployment last week, HP had a great earnings beat, US home purchases are up – without worrying about interest rates rising.
That double whammy of positive news left the markets in a great place today. Plus, it was good to see that the market recovered extremely quickly from the slump in early August. This indicates a stability towards the bullish side.