On Wednesday, as I discussed yesterday, the Fed hiked rates and despite the fact that hiking interest rates further tightens monetary policy, thereby reducing liquidity to the markets, the markets rallied anyway.
With the hopes of accelerated earnings recovery being muted by falling oil prices, higher borrowing costs, and a strong dollar, investors seem willing to forgo the basic fundamentals of investing to chase an already extended and aging bull market cycle.
This was noted yesterday in a note from Goldman’s Jan Hatzius, the chief economist warns that the market is over-interpreting the Fed’s statement, and Yellen’s presser, and cautions that it was not meant to be the “dovish surprise” the market took it to be.
“Surprisingly, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices.
The committee may have worried that a rate hike—especially a rate hike that was not priced in the markets or predicted by most forecasters as recently as three weeks ago—might lead to a large adverse reaction on the day, and wanted to avoid such an outcome by erring slightly on the dovish side. But we feel quite confident that they were not aiming for a large easing in financial conditions. After all, the primary point of hiking rates is to tighten financial conditions, perhaps not suddenly but at least gradually over time. And even before today’s meeting, at least our own FCI was already fairly close to the easiest levels of the past two years and this was likely one reason why the committee decided to go for another hike just three months after the last one.”
He’s right. The Fed, which is now tightening financial conditions (which should/will push asset prices lower), got the exact opposite result as everything rose Wednesday from stocks, to bonds, to gold.
In other words, market participates took the rate hike as another reason to “just buy everything.”
Of course, with bullish trends still very much in place, it has been, and remains, very challenging to dispute that point.
Just realize, eventually the mantra of “just buy everything” from overly complacent bullish investors, will change to “just sell everything.”
Of course, just understanding that particular point is just winning the battle.
Recognizing, and acting, on the change is what “Wins the war.”
Just some things I am thinking about this weekend as I catch up on my reading.
Lance Roberts is a chief portfolio strategist and economist for Clarity Financial.
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