As winter approaches, it looks like Santa Claus is warming up his sleigh and getting ready to hit the cold northern skyways. But what does the big man have in store for us this year?
The truth is, no one knows what Santa will be bringing us but one thing is certain – investors and financial markets should be keeping an eye out for the Federal Reserve and the bond market.
The Fed, the central bank of the United States, controls the money supply and many of our economic strategies. The Fed increases or decreases money in the economy according to its mandates. This includes controlling inflation and growth. Additionally, the Fed is also responsible for setting interest rates on debt, which have a direct effect on the bond market.
When the Fed sets higher interest rates, bonds become less attractive as an investment because a higher rate means lower returns. When they lower rates, bonds become more attractive, as investors are rewarded with increased returns. These interest rate movements can influence many other areas of the economy, such as business investment, consumer spending, stock market performance, and even the housing market.
While Santa will nearly certainly yield a Santa surprise this year, it is a good idea for investors to be mindful of the Fed and the bond market. Analysts suggest that rising inflation and Fed rates could cause a retraction in the stock market later in 2020. On the other hand, a recession caused by a global pandemic could cause a bond yield curve to invert, forcing investors out of the market and causing significant losses. It is important to keep an eye on both the Fed and the bond market in order to ascertain a sense of what the market environment has in store for us.
Overall, the outcome of this year’s economic climate remains a mystery. However, investors would be wise to watch the Fed and the bond market closely as they are key indicators of the market’s performance. Hopefully, this means that Santa will be bringing us lots of cheer this year!