The Dow Could Either Tank or Surge on Yellen’s Speech

janet-yellenThe SPDR Dow Jones Industrial Average ETF (NYSE:DIA) is going to make a big move today one way or the other based on Fed chair Janet Yellen’s speech from Jackson Hole. Let’s examine the potential scenarios.

Scenario 1: Ultra Hawkish

Yellen could go against everything the Fed has stood for since the financial crisis and get super hawkish, indicating two rate hikes in the final four months of the year. Although this would signal regulators see incredible strength in the U.S. economy, the Dow would sell off hard on the news (think a 2-3% drop or more), because it could signal the end of the easy-money era.

This is the least likely scenario of the four.

Scenario 2: Somewhat Hawkish

Janet could put her money where her mouth is and indicate one more rate hike is coming this year. This would mean the Fed sees enough economic strength to withstand higher moderately rates, but it would still cause a quick downturn in the Dow (think 1-2% or so).

This is the second least likely scenario, because although the move wouldn’t be all that major, it would still entail the Fed actually lifting rates. It’s been incredibly reluctant to do so over the past 8 years.

Scenario 3: Somewhat Dovish

Yellen could use some moderately hawkish speech but still indicate that the Fed won’t lift rates again this year. This would indicate tepid economic growth and continued need for central bank accommodation. The Dow would likely spike on the news, but the gains would be limited to say 1% or so.

This is the most likely of all scenarios, because it’s exactly what the Fed has been doing at nearly every meeting for the past few years.

Scenario 4: Ultra Dovish

The final scenario entails Janet Yellen suggesting that rates will remain very low for the foreseeable future. This would indicate weak economic growth, and the possibility that rate normalization would be much lower than originally anticipated. The equities markets would absolutely love this news, and the Dow would probably spike anywhere from 2-3%.

This is the third most likely scenario, based on the Fed’s recent language supporting gradual rate increases over time.


The DIA was mostly flat in premarket trading Friday at $184.37 per share. The largest ETF tied to the Dow Jones Industrial Average has risen about 6% year-to-date.

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