Investors are better off getting out of stocks or selling them short until the Federal Reserve goes back to looser monetary policy, says Michael Pento, president of Pento Portfolio Strategies.
The idea that the Fed will only raise interest rates once this year and then stay on hold “has no historical basis and is just wishful Wall Street thinking,” he says.
The Fed has kept rates near zero percent
since 2008, when the global economy shrank the most since the Great Depression. As U.S. business activity has bounced back and unemployment has fallen to a seven-and-a-half-year low of 5.1 percent, many Wall Street economists have forecast that the central bank will raise rates as early as this week.
Once the Federal Open Market Committee starts raising rates, it won’t stop until there are signs of an economic slowdown, Pento writes in a Sept. 14 blog
. He points to historical precedence of hikes in the past 30 years and to the “dot plot” estimates
by FOMC members that show rate increases through 2016.
“The Fed will only be able to move the Fed Funds Rate higher by 50 to 75 basis points before it becomes obvious even to the hopelessly confused FOMC that global markets and economies are in serious trouble,” he says. “This is why wise investors should now be out of, or short, the stock market. At least until the S&P 500 trades near 1,600; or the Fed transitions to an easing stance.”
The S&P 500 stock index
would have to fall 18 percent from its current level of 1,950 to hit Pento’s buy zone.
Albert Edwards, head strategist at Societe Generale, says it’s already too late for the Fed to avoid an economic calamity after helping to blow up asset bubbles worldwide.
When they do tighten and try to normalize rates, the asset bubble will likely burst and cause an even bigger crisis than in 2008,” Edwards says in a Sept. 10 report
. “But the longer they leave it, the more excess will be accumulated and the worse the ultimate deflationary bust will be so they might as well just get on with it now.”
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