An Up, Then Down Week
Stocks experienced a volatile week, with early gains reversing on Friday. In the end, the S&P 500 Index declined 0.15% to 1,958 and the Dow Jones Industrial Average fell 0.29% to 16,384. The tech-heavy Nasdaq Composite Index bucked the trend and held onto a 0.10% gain to end the week at 4,827. Meanwhile, the yield on the 10-year Treasury fell from 2.19% to 2.13%, as its price correspondingly rose.
The big event of the week was the Federal Reserve's decision to hold off on raising interest rates. However, the result was a reinforcement of investors' fears regarding sluggish global growth. Still, with the stock selloff of recent weeks, some areas of the market are beginning to look attractive. Case in point: emerging markets (EMs).
Waiting on the Fed – Then Interpreting It
Investors have spent much of the last couple of months fixated on the Fed. In the end, the central bank did exactly what most had come to expect: nothing.
Investors' initial reaction on Thursday was chaotic, with equity markets swinging between large gains and losses, before finishing the day largely unchanged. However, after a day to deliberate, investors adopted a decidedly negative view on Friday when stocks surrendered their gains for the week. Equity market volatility, which had previously dropped below 20, the lowest since mid-August (as measured by the VIX Index), quickly spiked back above average levels.
Why did the market interpret what was basically a dovish stance by the Fed so negatively? Largely because investors took the Fed's hesitancy as a sign of global economic fragility. Indeed, this fear is made worse by a continuing stream of soft economic data out of China; last week, for example, it was revealed that Chinese investment plunged to its slowest rate in 15 years.
But while stocks lost ground, bonds rallied, particularly those with shorter maturities. After rising above 0.80% for the first time since April 2011, two-year U.S. Treasury yields promptly plunged back below 0.70%. Outside the U.S., bond yields in Germany, Japan and Australia also fell on investor concerns that the Fed’s failure to act suggests greater concern over the state of the global economy.
With the Fed on hold and U.S. rates dropping, the dollar also fell. The U.S. Dollar Index is now off by around 3% from its early-August peak. The fall in the dollar and the accompanying drop in both nominal and real (after-inflation) rates predictably led to a bump in gold prices, with the yellow metal advancing around $35/ounce from the week's lows.