Tags: Jim Paulsen | Federal Reserve | Janet Yellen | CNBC

Will Fed's Inevitable Rate Hike Spark 'Scary' Correction?

By    |   Wednesday, 29 July 2015 07:31 AM

Jim Paulsen, chief investment strategist and economist at Wells Capital Management, looks forward to the Fed “finally turning the monetary boat” and raising rates “for the first time in about a decade” and says, “I just think it’s unrealistic to think the market’s going to skate right through that without a little turbulence.”

He told CNBC that he thinks the market has become a bit vulnerable and overvalued from a P/E standpoint in “the third longest period without a correction a correction in postwar history,” roughly 900 days.

He adds that earnings have become disappointing, joins others in seeing a weak advance/decline ratio, and sees the economy nearing full employment and needing a rate hike.

However, Paulsen is positive about the prospect of a correction and thinks it would be healthy for the market. He doesn’t think the correction will be more than 10%-15%, because traders have established a pattern of buying the dips, “and it’s worked so well.”

Paulsen concludes, “It could get a little scary, but I really think the bull’s not over longer term.”

He thinks the rest of the world “will hold up better” during this coming “gut check.”

He questions the strong consensus around the world that the dollar will strengthen when the Fed hikes rates.

This writer would add that during the recent appearances by Fed Chairman Janet Yellen on Capitol Hill, Democratic senators urged her to be cautious in raising rates until there is more evidence of wage growth, as they all complained about weakness in their local economies.

Doug Gordon, senior portfolio manager at Russell Investments, also thinks a rate hike is coming in September, arguing that it will allow the Fed “to recapture the monetary policy tools,” but he adds that “the bar will be pretty high when it comes to another rate hike in 2015.”

He relies on diversification to protect portfolios against any market reaction to the Fed’s action. As part of this diversification he plans to remain short fixed-income.

This writer would add that a 0.25 percent hike would be merely symbolic, and the Fed risks a reaction in a market that still doubts the Fed’s ability to act. So once the signal comes, it could touch off another “taper tantrum.”

Finally on the rate hike, the always entertaining and informative Richard Fisher, former President of the Dallas Fed, now advising Barclays PLC, told Tyler Mathisen that Fed policy will not be dependent on data from China, which he quipped take account of a “Central Committee put.”

He thinks it won’t be a major factor “unless it becomes globally disruptive, in which case it might impact the timing of reversing this zero-interest-rate policy.”

Mandy Drury asked whether any other factors might justify a delay from September. Fisher responded that North America and the English-speaking world are the “epicenter” of growth, and it’s necessary “to take away this uber-accommodative monetary policy in order to help our economy improve.”

Finally, the Futures Now traders told Jackie DeAngelis that they see the 10-year-bond market “stuck in a range” and not looking for a Fed hike in September, and the market might be a bit shocked if it happens.

Rather, the market is “awash in liquidity looking for a home.”

As for stocks, the traders joked about government support for the market by both China and the U.S.

This writer would add that evidently the Central Committee and Janet Yellen are in synch as sponsors of equity markets, a phenomenon that has never been seen before, something for traders to take into account when they refer to historical indicators.

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Robert-Feinberg
Jim Paulsen, chief investment strategist and economist at Wells Capital Management, looks forward to the Fed "finally turning the monetary boat" and raising rates "for the first time in about a decade."
Jim Paulsen, Federal Reserve, Janet Yellen, CNBC
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2015-31-29
Wednesday, 29 July 2015 07:31 AM
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