Takeaway From Fed Minutes: It's Time To...
To be sure, one of the key drivers to the global markets continues to be the state of central bank policies. Investors around the world have learned that the old cliche, "Don't fight the Fed," which was originally intended for the U.S. markets, seems to work regardless of the color of a country's currency. And as experienced investors know, the best bull markets are global in nature. So, with the FOMC apparently in no big hurry to move rates from the current historically low levels and the ECB, BOJ, and BOE all still printing money via their QE programs, the stock market bulls in the U.S. would seem to have a significant advantage.
Or do they? The minutes from the most recent FOMC meeting were released yesterday and we learned that there is a pretty big split on what the members of the committee want to do regarding the next rate hike. While everybody knows that Janet Yellen would prefer to err on the side of caution and leave rates at all-time low levels until any threat of deflation has been wrung out of the system, other members of the Fed disagree.
The inflation hawks on the FOMC actually have a couple pretty good points at this time. First, according to the committee's favorite measures, inflation has reached the Fed's own target levels. While there is no serious threat of inflation, the fact stable inflation is one of the Fed's two mandates would seem to argue that it is time for Yellen & Co. to return rates to more "normal" levels.
The other argument for Fed policy to get out of rescue mode is the state of the jobs market. Again, according to the Fed's own measurements, the economy is either at or very near to being at full employment. And with this being the Fed's other mandate, many argue that it's time to stop fretting and let the economy stand on its own two feet again.
Lest we forget, the Fed has been treating the economy like a patient on life support for more than eight years. And both the stock market bears and the inflation hawks will argue that such a prolonged period of low interest rates will undoubtedly result in some nasty unintended consequences. One example of this would be the explosion in student loan debt, which will likely curtail household formation for years as kids coming out of college are forced to commit a large portion of their income to those loans.
From a shorter-term perspective, it is interesting to note that stocks wound up rallying a bit in response to the release of the minutes from the July FOMC meeting. The thinking was that tone of the meeting was a bit more hawkish than had been expected as the committee made it clear that a rate hike is coming sometime in 2016.
So, why would such a statement cause stocks to rally, you ask? Several reasons actually. First there is the fact that other than fear of what might be happening around the world, the Fed really has very little argument not to return rates back toward more normal levels. So, with the Fed's credibility on the line, talk of doing the right thing is viewed as a positive.
Next up, we need to remember that higher interest rates mean higher profit margins for the banks. And in turn, higher profit margins mean improved earnings in one of the largest, most important sectors of the market. And the bottom line is higher earnings can justify higher stock prices.
In addition, the latest minutes seemed to dismiss the worry about what the BREXIT might do to the global economy. And while the major European banks remain in a world of hurt from a chart standpoint, the fact that the Fed isn't talking about global economic instability is also a positive.
And finally, there is the idea that returning rates to more normalized levels means the Fed believes the U.S. economy can handle it. It means that the Fed is no longer worried about deflation and that the U.S. is either at or very near full employment.
So, while Janet Yellen would probably prefer to keep rates uber-low until the rest of the world's economies can catch up with the U.S., the fact is that there just doesn't seem to be a reason at the present time to keep rates at emergency levels. And given the fact that the Fed doesn't like make any moves in front of a Presidential election, investors should probably get on board with the idea that we will see another rate hike in December - if not next month.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Global Central Bank Policies
2. The State of U.S. Economic Growth
3. The State of Oil Prices
Thought For The Day:
There's none so deaf as those who will not hear. -English Proverb
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
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