December 16, 2008
Spurred by the Fed marking down the fed fund rate to a never before seen 0.0 percent, prices accelerated. By the final bell, the NASDAQ and the S&P500 gained more than five percent, while the laggard DJIA rose over four percent.
These price increases are far from usual: since 2000, index prices have fallen as well as risen in response to the Feds announcements. Moreover, the average price decrease often is greater than the average index increase. Nevertheless, the number of positive price reactions exceeds the declines in a ratio of 9:6.
The record for the day following is not as encouraging. There are an equal number of rising and falling closes; however, the amount of the price declines is substantially from two to five times- greater than the average increase.
Yet with the current economic situation and, importantly, with a leadership change that uses straight and clear language in announcing policy decisions, market decisions more optimistic than in the past may well result in stronger prices.
For example, consider the significantly strong and unambiguous language of this paragraph from todays Fed announcement:
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
DJIA 4.20 percent
NASDAQ 5.41 percent
S&P500 5.13 percent