But all across Wall Street, traders will struggle to fall asleep tonight. That’s because it’s “Fed Eve” — and they’re trying to figure out if Santa Janet will leave them a lump of coal or a big ol’ pile of easy money.
The stakes couldn’t be higher, considering the Fed hasn’t raised short-term interest rates since June 2006. So what’s likely to happen, and how might markets react?
Well, the Fed clearly has the fundamental economic data to justify a rate hike. Policymakers have focused intently on employment, and the latest figures on unemployment and job creation were strong enough to give the Fed intellectual cover for an increase.
|What will Santa Janet do and say tomorrow?|
There has been a lot of handwringing about a lack of inflation. But today’s inflation figures even give the Fed some cover there (See the news digest section below for details).
More importantly, the interest rate markets are pricing in around an 80% probability of a hike tomorrow. A whopping 97% of economists polled by the Wall Street Journal recently said they expect the same thing. That means the most likely scenario is, in fact, a rate increase.
What is much less certain is how markets will react to a hike — or no hike in the small chance that’s what we get. Then you have the post-meeting statement from the Federal Open Market Committee and the press conference comments from Chairman Yellen. Either or both of them could impact markets, too.
My best read is that investors are ready for a hike, but they’re worried that the Fed is acting too late in the economic and credit cycle. There’s a significant school of thought the Fed missed its “window,” and may have to quickly stop — or even reverse — any hikes it does implement.
Indeed, this New York Times story today provides a historical perspective on U.S. rates. It posits that they could remain low for a long time even if we get a hike tomorrow.
On the other hand, we’ve never seen a wave of global QE the likes of which we have in the past few years. Nor have we ever seen major world central banks experiment with negative interest rates.
That means the consequences and fallout from a Fed hike could be unprecedented. Heck, we’re already seeing significant turmoil in everything from emerging markets to junk bonds — a sign investors are worried sick about even a discussion of tighter monetary policy, much less actual rate increases.
In this uncertain environment … one that could see several “Bloody Wednesdays” in the capital markets driven by Fed action or non-action … my suggested action plan is as follows:
|“The consequences and fallout from a Fed hike could be unprecedented.”|
Maintain higher cash levels than you have over the past six-plus years …
Take profits and cut losses more quickly than you’ve been doing …
Avoid economically sensitive stocks with lousy Weiss Ratings …
Stay away from investments in higher-risk bonds, currencies, commodities, and economies.
That will help insulate your portfolio come what may tomorrow.
One last thing to keep in mind: Central bankers can influence short-term market action. But once we get past the initial 24-48 hours of frenzied post-Fed trading activity, the underlying fundamental trends will reassert themselves.
To me, the biggest trend is the major turn in the credit cycle we’re seeing. That has been putting downward pressure on vulnerable stocks, and should continue to do so no matter what we hear out of Washington tomorrow.
So with less than 24 hours to go, what do you think the Fed will do? And what do you think Fed policymakers will say afterward? Do you think a hike is bearish for stocks, while no hike is bullish? Or do you think it’s the other way around? What will likely happen to stocks once all the Fed hoopla settles down? Share your thoughts below.
The great “will they or won’t they?” Fed debate will finally get settled tomorrow. In the meantime, you had some thoughts to share about Fed policy and its potential impact on markets.
Reader Howard said: “The sooner that the Fed gets out of the markets, the better. Yes there will be some casualties, but the markets will begin to become freer again. Bring on a modest rate hike as a sign of confidence and show some directional guidance.”
Reader Chuck B. added: “The idea of the Fed raising interest rates just so they can turn around and lower them a bit later is a real ‘LOL thought.’ At least it may hold off, for a little while, the idea of the banks charging interest to hold your money until you spend it. I fear that is coming sooner or later, as it already has in some countries.”
As for where markets may go in the weeks ahead, Reader $1,000 Gold said: “When people are fearful, be greedy. When people are greedy, be fearful. There’s lots of fear out there right now. My guess is all this negativity means we’re still stuck in the ‘bear trap,’ which is usually the last good buying opportunity before the market resumes its uptrend.”
But Reader Dave sounded a much gloomier note, saying: “We are repeating the same things that caused the 2008 market drop. Only this time, it will be much worse because we didn’t do the right things to correct the mistakes made in the five years leading up to 2008.
“The Fed still wants to raise interest rates and it was predicted that if it does, the market will react with a 1,000-point drop. Why are they all so stupid?”
Thanks for weighing in. If you haven’t done so yet, feel free to use the comment section below to add your opinion.
The Consumer Price Index flat-lined in November, which matched economist forecasts. But the “core” CPI that excludes food and energy rose 0.2% for the third month in a row. That pushed the year-over-year core inflation rate up to the Fed’s target of 2% for the first time since May 2014. A separate gauge of manufacturing activity in the New York region came in slightly ahead of estimates.
The diversified industrial giant 3M (MMM) cut its profit forecast, citing lackluster economic growth worldwide. The firm now expects to earn around $7.55 per share in 2015, down from a prior forecast of $7.60 to $7.65. 3M also trimmed its outlook for 2016.
So much money has flooded into junk bond ETFs and mutual funds, that even professional managers are worried about a reverse stampede. This Bloomberg story goes into a lot of detail on this issue. Worth noting from it:
“There are now 35 U.S.-based high-yield exchange-traded funds with $43 billion under management, compared with three funds with $1.3 billion in 2008, according to data compiled by Bloomberg. The number of mutual funds has grown to 252 from 100 in 2008 and assets increased to $326 billion from $126 billion.”
That’s a LOT of money that could drain out in a hurry as losses spread.
* Finally, Los Angeles hosted the biggest movie premiere in history last night for the release of “Star Wars: The Force Awakens.” The Walt Disney (DIS) release is expected to bring in as much as $2.5 billion in global ticket sales as it hits theatres this week.
What do you think about the latest inflation figures? How about 3M’s earnings warning? Are you planning to see the latest chapter in the Star Wars saga soon, and do you think the movie will move the needle on Disney’s earnings this quarter? Let me hear about it.
Until next time,
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