Fed’s Stock Market Distortions Unwind

The world’s financial markets changed dramatically entering this young new year, led by sharp stock selloffs and a mounting gold rally.  These are major reversals from recent years’ action.  The immediate catalysts were China’s plummeting stocks and ongoing yuan devaluation.  But the far larger underlying driver is the Fed’s first tightening cycle in a decade, which is just starting to unwind years of gross distortions. Just a few weeks ago on December 16th, the Fed’s Federal Open Market Committee chose to hike the benchmark federal-funds rate for the first time since June 2006.  This was widely hailed as bullish for stocks, since it implied the US economy had improved enough to weather a new tightening cycle.  The flagship S&P 500 stock index (SPX) surged 1.5% that day, as traders rejoiced at the Fed’s gradualist approach.

First published here: Fed’s Stock Market Distortions Unwind