Why market drop when Fed announced rate increase?

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goshenBogle
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Why market drop when Fed announced rate increase?

Post by goshenBogle » Wed Jun 13, 2018 3:38 pm

I am confused. As soon as the Fed announced late this afternoon that they were raising interest rates, the market (DOW) dropped. Why did it drop? The Fed announcement was not a surprise; we all knew it was coming.
Can someone help me understand why the drop?
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neilpilot
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Re: Why market drop when Fed announced rate increase?

Post by neilpilot » Wed Jun 13, 2018 3:43 pm

Remember that the market moves on emotion, not logic

Grt2bOutdoors
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Re: Why market drop when Fed announced rate increase?

Post by Grt2bOutdoors » Wed Jun 13, 2018 3:47 pm

Buy the rumor, sell the news.
Market's been rising leading into the announcement, they sell into the news.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

zeugmite
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Re: Why market drop when Fed announced rate increase?

Post by zeugmite » Wed Jun 13, 2018 4:18 pm

Futures markets were pricing in between 3 to 4 interest rate hikes this year. The Fed now project 4 this year (more than markets anticipated) and generally moving up the timetable of hikes. Prices are adjusting to this news.

goblue100
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Re: Why market drop when Fed announced rate increase?

Post by goblue100 » Wed Jun 13, 2018 4:20 pm

As bond yields rise, stocks become less attractive.
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

livesoft
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Re: Why market drop when Fed announced rate increase?

Post by livesoft » Wed Jun 13, 2018 4:42 pm

Several other things happened today besides the expected Fed rate increase.

And though the stock market seems to have gone down in price, it really didn't go down very much at all and well within the normal daily noise of price movements. And even bond ETFs are trading up from where one could buy them earlier this month.

Anyways, a day like today could have happened easily even if there wasn't even a FOMC meeting and announcement today.
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Riprap
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Re: Why market drop when Fed announced rate increase?

Post by Riprap » Wed Jun 13, 2018 4:54 pm

In theory, the value of a stock is it's future cash flows discounted to the present. If interest rates rise, then so does the discount factor which makes future cash flows less valuable today.

balbrec2
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Re: Why market drop when Fed announced rate increase?

Post by balbrec2 » Wed Jun 13, 2018 5:00 pm

goblue100 wrote:
Wed Jun 13, 2018 4:20 pm
As bond yields rise, stocks become less attractive.
The bond market and the fed are not the same thing

H-Town
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Re: Why market drop when Fed announced rate increase?

Post by H-Town » Wed Jun 13, 2018 5:04 pm

goshenBogle wrote:
Wed Jun 13, 2018 3:38 pm
I am confused. As soon as the Fed announced late this afternoon that they were raising interest rates, the market (DOW) dropped. Why did it drop? The Fed announcement was not a surprise; we all knew it was coming.
Can someone help me understand why the drop?
It could may as well go up. Then you can make up any argument for any direction the market takes on any given day. Nobody can prove you wrong. Plus, market movements put food on the table for day traders.

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bligh
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Re: Why market drop when Fed announced rate increase?

Post by bligh » Wed Jun 13, 2018 5:06 pm

The Fed also removed their statement that they expected interest rates to remain below longer run levels for some time. Which increases the probability that they expect interest rates to return to longer run levels.

3504PIR
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Re: Why market drop when Fed announced rate increase?

Post by 3504PIR » Wed Jun 13, 2018 5:08 pm

balbrec2 wrote:
Wed Jun 13, 2018 5:00 pm
goblue100 wrote:
Wed Jun 13, 2018 4:20 pm
As bond yields rise, stocks become less attractive.
The bond market and the fed are not the same thing
They are not, but that doesn't make his post incorrect.

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triceratop
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Re: Why market drop when Fed announced rate increase?

Post by triceratop » Wed Jun 13, 2018 5:27 pm

Everyone suspected the FFR would likely increase, but the dot-plot was not known and that was also updated today.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

mouses
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Re: Why market drop when Fed announced rate increase?

Post by mouses » Wed Jun 13, 2018 5:54 pm

bligh wrote:
Wed Jun 13, 2018 5:06 pm
The Fed also removed their statement that they expected interest rates to remain below longer run levels for some time. Which increases the probability that they expect interest rates to return to longer run levels.
What's a longer run level?

mortfree
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Re: Why market drop when Fed announced rate increase?

Post by mortfree » Wed Jun 13, 2018 6:30 pm

Higher rates... maybe there is hope for more people to be able to deduct interest when they take out a mortgage in the future.

Like a 250k, 30-year at 6%...

Engineer250
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Re: Why market drop when Fed announced rate increase?

Post by Engineer250 » Wed Jun 13, 2018 6:35 pm

I would like to know what factors it will take for 10-year treasury yield to get over 3% and actually stay there. Everyone seemed to predict the last time the FFR was raised that might do it, but it wasn't enough. People also thought today maybe, but it's still below. Last week it seemed like it was going to, but then I guess people panicked about Italian bonds so our yields stayed low as people kept buying. Now everyone is saying as feds cut back on quantitative easing it will go up, but will it really?

I know treasuries are not meant to beat inflation (unless TIPS specifically) but it's infuriating to see inflation going back up, and any sort of consumer saving rate stay abysmally low. But then, I'm sure I don't understand how it all is supposed to work.
Where the tides of fortune take us, no man can know.

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cfs
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Re: Why market drop when Fed announced rate increase?

Post by cfs » Wed Jun 13, 2018 8:20 pm

Normal stuff (for Miss Market to take a break) after rate increase announcements. However, you just don't want to be out of this market for one day! Good luck y gracias por leer / cfs
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goblue100
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Re: Why market drop when Fed announced rate increase?

Post by goblue100 » Wed Jun 13, 2018 8:24 pm

3504PIR wrote:
Wed Jun 13, 2018 5:08 pm
balbrec2 wrote:
Wed Jun 13, 2018 5:00 pm
goblue100 wrote:
Wed Jun 13, 2018 4:20 pm
As bond yields rise, stocks become less attractive.
The bond market and the fed are not the same thing
They are not, but that doesn't make his post incorrect.
Thanks. I probably used the term loosely, but then again:
https://www.wsj.com/articles/u-s-govern ... 1528908978

" U.S. government bond prices dropped Wednesday after the Federal Reserve raised interest rates for the second time this year and penciled in two more increases this year.

The yield on the benchmark 10-year Treasury note rose for a fourth consecutive trading session to 2.979% from 2.959% Tuesday. The two-year Treasury yield, which is more responsive to expectations for Fed interest-rate policy, rose to 2.578% from 2.539%. "

If the Wall Street Journal can call them bonds, I can too. :happy
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zeugmite
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Re: Why market drop when Fed announced rate increase?

Post by zeugmite » Thu Jun 14, 2018 1:35 pm

Engineer250 wrote:
Wed Jun 13, 2018 6:35 pm
I would like to know what factors it will take for 10-year treasury yield to get over 3% and actually stay there. Everyone seemed to predict the last time the FFR was raised that might do it, but it wasn't enough.
Long-term rates are influenced by growth prospects and inflation expectation. Raising short-term rates therefore tends to push down long-term rates, not up.

bayview
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Re: Why market drop when Fed announced rate increase?

Post by bayview » Thu Jun 14, 2018 3:56 pm

It's because it was the day before my biweekly contribution went in.

Now that the contribution goes in as of close of business today, it's back up. :annoyed

--in other words, there's a lot of irrationality in the market. Despite what the pundits on TV/ radio/ interwebz tell you, there is very, very, very rarely a clear cause-and-effect that explains market movements.

Other than my biweekly TSP contribution, of course.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

jalbert
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Re: Why market drop when Fed announced rate increase?

Post by jalbert » Thu Jun 14, 2018 4:13 pm

goshenBogle wrote:
Wed Jun 13, 2018 3:38 pm
I am confused. As soon as the Fed announced late this afternoon that they were raising interest rates, the market (DOW) dropped. Why did it drop? The Fed announcement was not a surprise; we all knew it was coming.
Can someone help me understand why the drop?
Don’t make the mistake of assuming someone actually knows the answer.
Risk is not a guarantor of return.

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