Tuesday, September 15, 2015

The Fed is Our Friend

This week marks the end of a systematic adjustment phase for the stock market. Generally, stocks hate interest rate increases. Since August, the market has been perplexed about facing the first rate increase from the Federal Reserve in nine years. Since August 20th, the market has dropped about 8%. This along with other weak economic indicators has caused a shift in opinion about the actions of the Fed.

A current survey of economists by the Wall Street Journal now predicts the Fed will leave rates unchanged Thursday. A hike is most likely to be deferred to future months. Our hint to what the Fed will do comes from repeated statements, “policy will be data dependent.” If this is true, there is insufficient data to merit a rate increase by the Fed. Threats to our economy loom from diving commodity prices, minimal wage increases, and a stubbornly low general growth rate. In addition, world economies are also weakening. Finally, our main trading partner, China, has a host of problems.

Because of these factors, a “data dependent” Fed is unlikely to make a move to hike rates. Our market fell principally on the fear of a rate hike so if this doesn’t happen, the markets could turn around and rally. 

This “fear of the Fed” marks a decent buying opportunity and is bullish for investors.  This is why the Fed could indeed be our friend.

Since July, and the ensuing turbulence, we have taken a defensive posture on the markets which means we limited initiating new positions and made hard decisions to sell some of our holdings. The eminent Fed decision could pave the way for market conditions to improve.

1 comment: