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Rate Hike Jitters Is Stressing Frail Bull Market

Rate Hike Jitters Is Stressing Frail Bull Market

(Dollar Photo Club)

By    |   Wednesday, 14 September 2016 07:11 AM


Good God, I’ve never seen such a fuss made about the possibility of interest rates rising a mere quarter of a percentage point. More than anything else, this market is fixated on the percentage odds of whether the Fed will chose to move interest rates a half a millimeter or not this month or maybe two months from now. It didn’t used to be like this.


Last decade, the Fed raised the discount rate a full five percentage points and the market yawned it off. On Friday, one of the Fed Governors indicated that it might be likely that the central bank will raise rates 0.25% a little sooner rather than later. And the Dow tanked about 400 points. On Monday, another Fed Governor insinuated that maybe the Fed won’t be so inclined. And the Dow soared 200 points.

What the heck is going on?

Either this bull market is so frail that the slightest change in any one of the moving parts sends investors running for the exits like frightened school girls; or the Fed has so involved itself in the economy and the market that a 0.25% rate hike actually does make a meaningful difference. Neither scenario is any damn good.

Let’s first take a look at the frail bull market theory.

The market indexes are selling at very high valuations late in the bull market while the global economy stinks and earnings have been lousy. The reason stock prices are so high is that in this world of near zero interest rates is because money has no place else to go but stocks to earn a decent return, and any fooling around whatsoever with the dynamic spooks the market.

Of course, a 0.25% hike or even a 1% hike in short term interest rates doesn’t really change the fact that stocks are still the only game in town. The volatility is mostly due to nervous Wall Street types. These are traders and money managers that need to justify their excessive salaries. They can’t afford to miss any move in the market and look bad.

Then there’s the Fed and the idea that even a tiny rate hike will damage the economy.

Technically the central bank operates under a dual mandate of low unemployment and stable prices. But in today’s world, the real goal is to not offend anyone. The Fed has stated its intention to gradually normalize rates (from the current 0.25% - 0.50% to around 4%) but can’t seem to do so because the market never likes the idea.

In the two years since the Fed has stated its intention to normalize rates it has only mustered the gumption for one 0.25% hike last December. Although the Fed stated the goal of raising rates four times in 2016, it hasn’t raised yet. Every time the Fed floats the idea of a rate hike the market has a negative reaction, then the negative reaction tips the Fed to not hike.

But maybe the Fed isn’t just gutless.

Maybe just a tiny 0.25% rate hike will have a major impact on the economy and markets, like a sneeze causing an avalanche. With much of the world’s sovereign debt now paying negative interest anything above zero is significantly higher. The very act of the US raising rates, while just about every other major economy is going in the other direction and lowering rates, creates a chasm.

The divergence in central bank direction (no matter how small the rate hike) could cause the dollar to rise in value. The rising dollar would then put a damper on the earnings of US corporations with sales overseas at a time when earnings barely justify current stock prices.

The current rate hike angst may be just a bunch of nervous Nellies overreacting. Or it could be that central bank activities has delivered us to such a dangerous place that even the tiniest action could end the recovery and the bull market.


The problem is that central bank meddling has been so massive and so unprecedented that no one really knows what will happen.

The real Fed choice is between the unknown consequences of waiting too long to raise rates or the unknown consequences of raising rates. The Fed is just afraid to cut the wire and see what happens.   

Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.

To read more from him, CLICK HERE NOW.

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TomHutchinson
Good God, I've never seen such a fuss made about the possibility of interest rates rising a mere quarter of a percentage point.
red, rate, hike, economy
737
2016-11-14
Wednesday, 14 September 2016 07:11 AM
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