The Fed: Santa or Scrooge?

Written By Briton Ryle

Posted December 21, 2015

By now you probably know what the Fed left for investors under the Christmas tree: a quarter-point interest rate hike wrapped up in a nice box with a fancy bow and a sweet note that read something like: 

Dear Investors, we at the Fed know you’re worried about the weak global growth and the effect that interest rate hikes will have on the U.S. economy. Please understand that we are aware of the issues. Maybe, if conditions warrant, we might push interest rates higher with four more quarter-point hikes in 2016. That would bring the rate to 1.25% this time next year. But the next quarter-point hike probably won’t come until June or July of 2016. We hope you have a great holiday. Love, The Fed.

Now, investors have been pretty clear about what they wanted from the Fed. It was written in bold on the list: “We want a (small) hike, and we want you to say there won’t be another one for a while.”

I don’t know how else to interpret the rally that we saw heading into the Fed meeting. The consensus was 80% in favor of a rate hike. And the near certainty that the Fed would (finally) act gave weight to that rally. Investors knew what was coming, and they were ready…

And the initial reaction to the Fed’s gift to the market was good. Stocks ramped higher after the Fed delivered a quarter-point interest rate hike — the Dow added nearly 200 points on Wednesday afternoon. 

But then there was Thursday. The Dow sold off 280 points. And on Friday, it got worse. The Dow dropped 367 points. 

What the heck? Didn’t the Fed do a pretty good Santa Claus impersonation and give the market just what it wanted? 

Well, the answer is yes, it did get exactly what it wanted. And sometimes that’s a problem…

All I Want For Christmas…

You have to remember that any market is a two-way street. It takes buyers and sellers to make a market work. Some people have to be buyers, and other people have to be sellers. That’s what keeps prices moving.

I think that’s what went wrong last week. Most investors were buying stocks up to and right after the Fed’s rate hike announcement. They clearly thought there would be more buyers stepping up after the Fed delivered its gift. 

But the buyers didn’t step up. Investors were leaning way too bullish. And when prices started falling because nobody was buying, well, we got a mini panic that pushed prices 600 points lower on the Dow. 

Yeah, I really don’t think it was much more than that: an imbalance of buyers and sellers. And I would add that the trading “machines” — the algorithm-driven trading programs that now make up a large portion of daily buy-and-sell volume — helped make the declines look worse than they actually were.

You see, while they may be pretty sophisticated, the machines are still machines. They don’t think. They simply seek out imbalances. If they can buy a stock and then sell it a penny higher, they do it. Then they buy the stock again and push the price another penny higher. And they keep on doing this until they are challenged…

This is why the market tends to grind in the same direction on most days.

That may sound simple-minded. Maybe you want to look for a big conspiracy, for signs that we are at a major turning point for stock prices. And I will grant you, there are a few reasons that we might be looking at more downside for stock prices…

Global growth seems to be weakening, oil prices are causing real pain for both equity and high-yield bond investors, and commodities aren’t doing much better…

Same Old Story

Now, before you get too worked up about the prospects for your investments, take a look at this chart…

dividends small wd1221Click Image to Enlarge

This chart shows that the dollar amount of dividends that U.S. companies are paying to their investors is at an all-time high. That means if you own stock in companies that pay dividends, you’re making more money than ever. 

This chart also shows that more companies than ever are paying dividends. So it’s more likely that the average investor owns stock in companies that pay dividends. (If you don’t know, “dividends” are the portion of profits that companies pay to their shareholders every year.)

Dividends are one of the most important reasons investors should invest. Because when you buy stock in a company, you really do become a partial owner of that company. And as an owner, you are entitled to a share of the company’s profits. That’s what dividends are: your share of the profits delivered to you as an owner.  

Dividends are a cornerstone of the whole concept of capitalism. Dividend-paying stocks allow even small investors an easy way to engage in capitalism. 

There have been many studies conducted by various think tanks about where investment profits come from. The conclusion is usually the same: Between 80% and 90% of all stock market profits over time come from dividends. Let me give you an example…

Let’s go back 25 years to 1988, when $100,000 would have bought you 2,173 shares of McDonald’s at $46. Today, if you reinvested those dividends, you’d have 25,833 shares of McDonald’s worth $2,531,700 — and you’d get $79,565 in dividend payments this year alone.

McDonald’s was hardly an unknown stock at the time, and you still could have made enough in 25 years to live a pretty good life.

Now say you bought Starbucks when it went public in 1992. Shares were $17, so $100,000 would have gotten you 5,882 shares.

Starbucks has split its shares five times over the last 20 years — and it just started paying a dividend in 2010. Today, if you had reinvested those dividends, your 5,882 shares would have grown to 196,761 shares…

That $100,000 would be worth nearly $15 million! Not only that, but you’d be raking in $165,279 in dividends this year.

That amounts to a 148,222% gain in 20 years.

Now, I understand you may not have $100,000 to get your investments started. That’s fine. I didn’t start with a big chunk of money either. The point is to get started as soon as possible.

Don’t worry so much about where the market’s headed (though it’s always nice to buy stocks when they are down big, like last week). Get yourself a Roth IRA account, and get busy.

Until next time,

Until next time,

brit''s sig

Briton Ryle

follow basic @BritonRyle on Twitter

follow basic The Wealth Advisory on Youtube

follow basic The Wealth Advisory on Facebook

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

Angel Pub Investor Club Discord - Chat Now