The Fed says… stay tuned

All the commentary after the Fed’s rate announcement last Thursday reminded me of the immortal words of former Fed Chairman Alan Greenspan: “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.” Welcome to Fed-speak.

I think what Miz Yellen and her cohorts did in keeping the status quo in place for interest rates – for now – certainly qualified for inclusion in Mr. G’s comments. They either supported or undermined your thoughts about what the Fed “should do.” Their decision to leave rates unchanged kicked off an immediate rally Thursday followed by losses as investors wondered what dangers they don’t see could make the Fed flinch from raising rates.

Let me quote Miz Liz Ann Sonders, she being the Chief Market Strategist for Chuck (Charles Schwab). She said, “We also want to remind investors that we believe that pace and magnitude of rate hikes is much more important than the initiation’s timing-to both the economy and the stock market. Fed Chairwoman Janet Yellen, and other FOMC members, have been taking great pains-amid the uncertainty-that the pace of rate hikes will likely be slow. This should both reduce the risk of a financial accident and serve the equity market better.”

Miz Yellen herself called the possibility of being us being stuck at zero interest rates indefinitely “an extreme downside risk that in no way is near the center of my outlook.” In her post-release press conference, the Fed chair added that, as Liz Ann stated, the path of the Fed’s first rate hike in nearly a decade is more important than its timing. Smart ladies, in my opinion.

Regardless of when, as or if rates get raised, it certainly appears as if short-term interest real rates (meaning, after inflation) will likely be staying negative for several more months.

Investing considerations

Skepticism over stocks’ longer-term upside potential hasn’t faded. If anything, it’s increased.

Old false fears are behind much of this skepticism. I think this skepticism says more about how investors currently feel than what stocks will actually do. And yet many investors remain convinced the bull market needs central bankers’ help. (I’m definitely not one of those…) Of course, we also have a hard landing by the Chinese economy or pressure from low oil prices to fuel some people’s concerns. All of these are all well-known and aren’t enough to tie up the bull.

Adding to this generally negative feeling is how investments of all sorts have fared this year – so far. According to a recent study from Capital Spectator covering 14 Exchange Traded Funds (ETFs), each representing markets in US domestic and international stocks, as well as bonds, commodities and real estate investment trusts (REITs) through the 11th of September, there are no segments showing any gains for the year-to-date. The “best” result was US bonds being down buy 0.3%. This is, by definition, short-term stuff and unfortunately provides the basis for most financial media headlines.

Now, compare that data with a report from the Commonwealth of Virginia Retirement System. Their study stated that the annual US S&P500 stock market return over the last 89 years has had positive years occurring 73% of the time. The negative years have occurred just 27% of the time.
Pretty good – assuming, of course, the investor stayed focused on their strategy over the long-term and isn’t emotionally driven to act against their best interests.

On the more positive side, Thursday’s Fed report said the bank now expects 2015 US GDP to grow 2.0-2.3%, up from its previous outlook of 1.8% to 2.0% growth. Further, the US economy remains healthy and this recent stock market volatility has changed very little of that story. We at Opus don’t believe your investment plan should change either. We believe the bull market is intact as global monetary policy is loose, economies aren’t falling off a cliff (really, they’re not), and our consumers are in good shape, getting additional help from the lower commodity prices.

Summary

A not small part of the recent market activity can be simply attributed to profit-taking after an earlier run-up. With the thought that rates will not change for a while, interest rate sensitive issues such as utility stocks, REITs and precious metals had a bit of a rally. It’s likely those sectors will fall back again when/as/if the rate hike actually looks real. Conversely, things still look pretty good for the techs and financials from here.

Be aware too that many stocks, especially the large, well-known companies, tend to move in the same direction in these market swings. The reason is that they’re all automatically included in groups of stocks that are being rapidly bought and sold by traders intra-session. Such movements are totally short-term trades and not necessarily reflective of the individual stock’s financial picture.

The most unfortunate part about the lack of a rate move means we get to endure at least another month of unnecessary media hand-wringing and pontificating over the timing of a rate hike. (Personally, I would vastly prefer they just get on with it but my membership on the Fed committee has apparently been held up, so I have no input yet…)

As to when the Fed will actually make the move, neither I nor anyone else has any idea.

No matter what happens, please understand that the market’s short-term gyrations in response to the Fed are just noise – the bad kind that can distract you from the fundamentals. As an example, remember all the carrying on about tapering, as in how it would definitely damage the market and derail the bull? Not quite. The US economy has continued to grow at a moderate pace and I just can’t see how a 25 basis point (1/4 of 1%) rate hike would change that.

Don’t worry about these near-term rate hikes. Believe it or not, they’ve happened before and will definitely happen again. And don’t waste time focusing on the decision of the moment.

Focus instead on the trend…and the trend remains that rates
will be going up – eventually.

Cheers!

Mike

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/helping-advisors/EconomyMarkets/EconomicIndicatorsDashboard/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns.

Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.