‘Apocalypse Now’?

Sure, There are apocalyptic events in the stock market, but the media makes them sound almost routine even though they are few and far between. Market attention via the media has been wrapped around another Fed fund rate increase as a catalyst for such an event. It is very doubtful that a quarter point increase in the rate would be a disaster. In fact, worry over a Fed rate increase at this point is ‘much ado about nothing’.

With the financial media everything is apocalyptical

As an example, Europe has been a continuing media worry, something that might lead us into the abyss.  I’ve been in Europe the past two weeks. Much to my amazement, despite Brexit, the refugee crisis and terrorism the joint was jumpin’ … crawling with touristas spending money. Of course, neither the foreign media or the domestic sources I follow reported on this (much too uplifting). Their focus recently has been domestic centric. In the US it Has been all about TRUMP (a tragedy), the Olympics (sadly Ryan Lochte’s posse–a real tragedy) and in the financial media, Fed speak and interest rates.

I mean, man, like ‘its deja vu all over again,’ groundhog’s Day. The minutes of the July FOMC meeting came out last week and concerns over what Chairperson Yellen would say in her remarks at this week’s Kansas City Fed economic symposium in Jackson Hole began to bubble up.  A Wall Street Journal article reporting on the meeting was headlined: “Fed’s July Minutes Show A Split Central Bank Seeking to Keep Options Open.” You would think there was some major controversy here, but the actual vote was 9 to 1 for maintaining the current posture. By the end of the week this is all CNBC was talking about. They were blaming the market’s lackadaisical performance on uncertainty about when and how many quarter point bumps in the Fed funds rate we might have to endure. I blame the summer doldrums (many Wall Streeters at the shore in August). The real question should be, “why should we care care?” The obvious answer is WE SHOULDN’T. It is noise. Yet, here is the headline that greeted subscribers to CNBC’s web edition Monday morning: Yellin’s speech at Jackson Hole set to dominate the mood in Wall Street.”

Forecasters have been continually wrong about the impact of  policy changes

Remember the end of the infamous bond-buying binge, a.k.a. Quantitative Easing (QE)? That was going to be the end of the world as we knew it… it didn’t happen. When the taper of QE was announced in December of 2013, the ten-year US Treasury yield spiked to 3%. It is now 1.57%. The S&P 500 was 1573–1/1/14 (8/19/16 — 2183). I mean when this happened there were people absolutely screaming this would be the end of the bull. In December of last year the same rap was on regarding the first quarter point move in the FF rate. The S&P stood at 2029 (1/1/16) and the ten-year yield had spiked to 2.33% (again 1.57% right now with the S&P sitting at 2183). In both instances the fear, the flight-to-safety trade took over. People were so fearful of stocks that they were willing to accept little or no return in a bond with a guarantee of getting their principal back. This will probably be the case again as investors, fearing the impact of a minuscule rate increase, run to safety. This fear mindset augers well for stocks. It appears that even though we have attained new all-time highs, there is very little froth in equities. Meanwhile, those so-called ‘safe’ bonds will really get hurt when rates eventually turn up.

Let history be your guide on the pace and magnitude of rate increases

If history is any guide it would seem that it might take years to get the Fed funds rate back to even a 2% level, which would still be well below historical norms (Avg. annual FF rate over 5%+ the past 35 years). Meanwhile, earnings  would continue to grow along with dividends. Financing costs would continue to remain relatively stable on a gentle upward path.

To refresh your memory, the first step in normalization came in January 2014 when the Fed began to taper its Quantitative Easing bond-buying program. The taper was completed October 29, 2014. It took another 14 months (December 2015) before they made the first move raising the fed funds rate 1/4 point. Eight months later and we are still awaiting our second increase. Clearly the path upward is ‘low and slow.’ Even with all the evidence favoring this trajectory, every time the Fed speaks, monetary hawk or dove, the punditry goes crazy, much to the disadvantage of those who would pay attention.

Ergo, no apocalypse now. 

What’s your take?

P.S. ‘No apocalypse’ does not mean ‘no corrections’. Corrections are normal and you should expect them.  They can be violent and feel apocalyptic. Generally, most corrections are scary, but not the end of the world.

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