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Fed clears the way for a year-end rally

Nicole Goodkind
Nicole Goodkind

Janet Yellen, chair of the Federal Reserve, announced yesterday that the Fed doesn’t expect to raise interest rates until next year and likely won’t begin the process until at least late April. The Fed will be "patient in beginning to normalize the stance of monetary policy," said Yellen.

Analysis largely expected the Fed to remove language from its statement that said it would keep interest rates low for a “considerable time,” but the language stayed and markets rallied. Both the Dow (^DJI) and S&P (^GSPC) had their best days of 2014 yesterday. Markets were also up sharply this morning.

So does this mean it’s smooth sailing for markets for the next six months?

Related: Markets get a shock and Fed does nothing: Gary Shilling

Prior to the announcement markets experienced a sharp downturn due in large part to how-low-can-they-go oil prices, leaving many to believe that the typical end-of-year rally wouldn’t happen in 2014.

This was a very “exuberant reflex upside reaction to what the Fed had to say,” says Yahoo Finance senior columnist Michael Santoli. “I don’t think it was the specific words—I think it was that there were no sudden moves, that Yellen wants to ease the markets slightly into tightening and that there was no real change about the strong U.S. economy.” He believes that these statements have people chasing the idea that they don’t want to fall behind in the last two weeks of 2014.

Related: Economy flashing signs the Fed needs to hike rates: Sonders

Santoli sees this rally extending for a bit, “the question is whether we can beat those all time highs we saw a couple of weeks ago,” he says.

Oil prices have stabilized a bit since their rapid fall in the past weeks. “If you looked at non-stock markets nothing really dramatic happened yesterday,” says Santoli. “Even the treasury market did not move in a dramatic way…It’s just the stock market that overshoots on a regular basis.”

Santoli doesn’t believe that it’s “up, up and away” for stocks but he does believe that the feeling that central bankers are once again traders friends and the U.S. economy seems strong will keep markets in the green.

The biggest risk we’re facing says Santoli is that this is just kind of a bounce. “You see the corporate bond market weaken up, we see the oil market not hold together, Greece looks like it’s falling apart again…all of this stuff could get the markets attention, we just don’t know if or when.”

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