Ignore ETF Knee-Jerk Reactions To Fed

December 23, 2015

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Corey Hoffstein, co-founder and chief investment strategist of Boston-based Newfound Research.

This month's Fed meeting ended with the beginning of the long-awaited rising rate environment. It has been nine years since the last rate increase in 2006, and in that time, the economy has gone through the worst crisis and then the longest bull market in recent history.

Even looking at previous interest rate hikes may not be indicative of how markets will react to this environment if markets are substantially different now.

However, the 025% increase in the target federal funds rate did not have a large impact on the markets when the news sunk in, especially not in the context of some of the recent volatile market moves we have witnessed.

Using intraday minute-by-minute data from Google, we can see that when the Fed announced the rate increase, the initial reaction in the market was a sharp decline in the SPDR S&P 500 (SPY | A-98); the long-term U.S. Treasurys fund, the iShares 20+ Year Treasury Bond (TLT | A-83); and the biggest gold ETF, the SPDR Gold (GLD | A-100).

Ignore ETF Knee-Jerk Reactions To Fed

For a larger view, please click on the image above.

Tide Quickly Changed

As the next half hour progressed, traders essentially leveled out SPY and GLD to their pre-announcement levels. TLT, on the other hand, increased by 1.23%, perhaps likely based on the Fed's reiteration of "gradual" interest rate increases.

If you believe this is a representation of an efficient market in U.S. Treasurys, this indicates the market had already priced in the small increase and had already priced in further increases into 2016.

When Fed Chairwoman Janet Yellen hosted a press conference from 2:30 p.m. to just past 3:30 p.m. ET, we again saw the markets react.

This time, GLD increased before retreating to near its previous level. SPY began to climb, and TLT declined, as we would expect it to when rates increased, or were anticipated to increase over the coming months.

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