Investing January 24, 2002

Fed Moves Move Nasdaq More

January 24, 2002 (PLANSPONSOR.com) - Stocks on the Nasdaq market react most emphatically to surprise Federal Reserve interest-rate hikes or when the central bankers make less of a rate cut than Wall Street expects, a new Fed study concludes.

Reported by

Fred Schneyer

For example, according to a Dow Jones news report, an unexpected hike of one-quarter point in the key short-term rate will prompt the Nasdaq Composite Index to fall 2.5% — the largest change of any US stock or bond index in reaction to a Fed interest rate move.

The study finds, that large “Old Economy” stocks, such as those on the Dow Jones Industrial Average, tend to be less sensitive to Fed surprises than high-tech stocks.

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According to the study, a surprise one-quarter percentage-point increase in Fed rates would cause:
· the Dow to drop 1.5%
· the Wilshire 5000 Index to fall by 1.8%
· the S&P 500 to stumble by 1.9%.

Fed researchers said the sensitivity of high-tech stocks and non-blue-chip stocks may indicate that their stock prices reflect investors’ expectations of future profits rather than current profits.

A Fed rate increase, accordingly, tends to make investors less willing to wait for profits to materialize.

Looking at effects of Fed announcements on other asset classes, the study concludes that long-term bond yields show a smaller reaction than short-term bonds.

Fed officials like chairman Alan Greenspan recognize the effects their words can have on the markets and try to telegraph future interest moves in speeches and public appearances before those moves are announced.