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.

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.

Mutual Fund Flows Strong in 2001

January 23, 2002 (PLANSPONSOR.com) - Despite a slow December, a weak equity market and the events of September 11, a record amount of new money flowed into mutual funds in 2001, according to data from Lipper Inc.

Over the year, $434.5 billion of new money poured into mutual funds, with:

  • $33.6 billion going into stock funds
  • $75.6 billion going into fixed income funds
  • $325.3 billion moving into money funds.

December Data

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According to Lipper, in December:

  • equity funds took in $1.7 billion
  • investors withdrew $900 million from bond funds
  • money market funds saw outflows of $28.4 billion.

Among stock funds over the month:

  • diversified domestic funds had inflows of $3.1 billion
  • sector funds saw outflows of $2 billion
  • investors withdrew $1.3 billion from world equity funds
  • science and technology funds – the month’s biggest loser – saw a leakage of $1.2 billion.

In addition, value funds attracted $7 billion in new money over the month, while growth funds had an outflow of $5.4 billion.

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