Courtesy of Pam Martens.
James Grant Discussing Fed Rate Hike on CNBC, December 16, 2015
In a properly functioning, rational, and efficient market, any form of Fed tightening after seven years of filling the punch bowl with an elixir of easy money should have been viewed by the markets as a contraction of monetary policy and sent both stocks and risky bonds plunging. But what we saw in the markets yesterday can only be described as bizarre.
The Dow Jones Industrial Average, composed of 30 large cap stocks which are viewed as a barometer of the overall U.S. economy, soared 244 points by the close of trading. The Nasdaq, made up mostly of smaller companies than those in the Dow, which would have a harder time in a higher interest rate environment because their debt is rated lower generally, also soared and closed up 75.77 points.
A rise in interest rates should have sent utility stocks plunging since it is their dividend yields that attract investors and a hike by the Fed will make Treasuries and high grade corporate bonds more competitive to utility stocks. Instead of dropping, the Dow Jones Utilities Average closed up 2.73 percent.
Dow Transports, which have lost 1500 points in the past year as the economy lost steam and energy prices plunged, decided a Fed tightening is just the thing the economy needs to revive itself and closed up 1.80 percent.
But for whacko market reaction, nothing can compete with what junk bond (high yield) Exchange Traded Funds did yesterday. Flipping logic on its head, investors in two of the most popular junk bond ETFs decided that the perilous state of junk bonds would be enhanced by tighter credit conditions. (Just last week a junk bond mutual fund and a junk bond hedge fund shut down investor withdrawals of their money because of a lack of liquidity in the market.) Yesterday, the iShares iBoxx High Yield Corporate Bond ETF closed up 0.76 percent while the SPDR Barclays High Yield Bond ETF closed up 0.86 percent.
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