Today’s Gross Domestic Product gain was a measly 0.7%, bringing last year’s growth rate to 2.4%, about equal to the economy’s gain in 2014. Those results, combined with events overseas, may give the Fed pause this year in raising interest rates any further.
Neither rising inflation nor an overheating economy seem to be a realistic assumption for this year, according to the latest data, so maybe the Fed’s one rate hike in December was it for the remainder of this year. At least that’s the thinking among Fed Heads who just love to outguess the Fed.
Last night, the Japanese government decided to opt for extending their monetary stimulus policy, which has been in place for over two years. In a move similar to an action already implemented by the European Central Bank, Japan’s central bank is now opting to charge banks an interest rate or fee for parking funds with them, rather than lending the money to corporations and consumers.
Their bank is hoping that this will stimulate more lending, investment and ultimately economic growth. The jury is still out on how successful this “negative interest rate” program will be. Economists will be watching this experiment closely, but it is too soon to tell if it will work.
However, as a result, European and Japanese central bank policies will continue to drive their interest rates and currencies lower against the U.S. dollar and rates here at home. In effect, this will accomplish the same outcome as if the Fed did raise interest rates here at home this year. Thus, the belief that, as far as Janet Yellen and the rest of the central bank members are concerned, the rate rise last year will be a “one and done” maneuver.
In other news, you may have noticed that the price of oil has had a 20%-plus gain over the last week or so. Whether this is a “dead cat bounce,” an interim bottom, or a response to rumors that Russia and Saudi Arabia may come to a deal on reducing production, matters little. Oil is up, therefore stocks have stopped going down, at least for now.
Of course, we won’t know until later whether the present rally in stocks and energy heralds an end to the correction or simply a period of breathing room before the next onset of selling. Either way, I urge investors to hold on for now and watch developments.
This week the action was encouraging. Stocks traded in a tight trading range. That could indicate a short-term bottom in the indexes. If that is the case, the next level I will be watching on the S&P 500 Index is the 1,960-2,000 level. That will be, in my opinion, a critical area that could determine whether this pull back is over or we have more pain in store for us in February.
Now remember sports fans, so far the decline in the indexes has been less than 10%. That is totally within the ballpark of what an equity investor can expect every year in the stock market. If you find that this decline has given you more concern than normal, do not blame your advisor. What is really going on is what I call “risk creep”.
In short, you have been lulled by years of market gains. Almost imperceptivity, you have increased the aggressiveness of your portfolio over time to a level that is now beyond your comfort level. Once this correction is over, you need to re-examine your risk tolerance and adjust accordingly.