The New York Times’ Jeff Sommer’s descriptor of last week’s news backdrop from Fed Chair, Janet Yellen’s ‘Humphrey-Hawkins’ testimony before Congress, as well as a slew of corporate earnings calls provided little enlightenment. The outcome in “Plenty of noise, … “ was not unexpected (as was also the case with the tepid guidance out of corporate America … the old aim-low-and-surprise-on-the-upside trick). It seems the Chair, for some strange reason, does not want to roil the stock market. And, as everybody knows, if she said anything emphatically about moving the Fed Funds rate back to a more normal level (when and by how much?), it would destroy stocks. You know, just like what happened when the “Dreaded Sequester” went into effect, just like the market blew up when the Fed began to taper Quantitative Easing (QE) and OMG, what about that collapse when QE ended last fall.
Wait a minute…
My memory fails me. None of those most-forecasted disasters ever happened. All hell did NOT break loose. My question is, why should this normalization, when it comes, be any different? Common wisdom seems to contend that higher rates will be the death knell for this market. Very much like the end of QE was supposed to bring higher rates. It did not … instead rates are much lower today.
But, I think you get the point of my question. What everybody knows or suspects will hurt the market, probably won’t. It is what you don’t know or cannot fathom, like September 11, 2001 or the depth of the issues involved in the financial crisis that will kill you (at least in the short run). Although broadsides like this may be brewing as we write, at least on the financial side, events of the nature we experienced in 2008 and 2009 take years to maturate. The last systemic heart attack we had was 1929, 86 years ago. The next one may come sooner, because technology has given us the tools to speed things up. But, I do not believe it is just around the corner.
So, back to Chairman Yellen … what might she do to improve things?
Since 1953, the Fed Funds rate has averaged well over 5%. In fact, the decade of the 1990s saw the S&P 500 return 18% compounded with the Fed Funds rate averaging 5.15% . This perspective needs to be part of the dialogue. So, when she proclaims, loud and clear, the Fed’s desire to normalize rates in June with a quarter point increase, no one will be surprised or alarmed. I believe that the Fed should lay out a, albeit data-dependent, plan to move rates up 1/4 point per quarter for the next eight quarters. Voila! … Uncertainty removed. At the end of 2 years, we’d still be less-than-half the average rate since 1953. (Fed Data–Historical rates)
Then we can focus on some other uncertainty…
Maybe the joke that has become Congress, threatening to leave the Department of Homeland Security unfunded as a ploy to get its way on immigration, is the next big thing. This mind-boggling stupidity really is a problem, and I believe it will come back to bite us … as many important issues (education and infrastructure) involving our global competitive position are neglected in pursuit of re-election and petty political sniping.
As usual, it is a bunch “… of sound and furry, signifying nothing.”
What us our opinion?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.