Insights & Advice

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The Fed raises rates and the markets celebrate

How different from a year ago! In December of last year, the Federal Reserve Bank hiked interest rates one quarter of one percent and markets quaked. This week they raised rates again, by a similar amount, and the markets hardly blinked.

On Wednesday after the announcement, traders did sell the market off but recouped all those losses by the next day. The Fed’s decision was unanimous among its seven-member committee. It was based on the central bank’s Federal Open Market Committee’s optimism that the economy will experience further gains as will the rate of employment.

They also indicated that there could be as many as three more rate hikes in 2017, depending, of course, on what the economy actually does. Chairwoman Janet Yellen in a Q&A session after the announcement said she would take a wait-and-see approach to President-elect Donald Trump’s plans to stimulate the economy. She did question the need for additional economic stimulus, however, which caught the market by surprise.

Investors, heedless of an increasing chorus of warnings not to chase this market, seem to have abandoned all caution and are taking every opportunity to both sell their bond holdings and buy stocks. There are some indications that a lot of new money is coming from retail investors, who have been long absent from the equity market.

But not all is coming up roses in the financial markets. The U.S. dollar continues to climb with the Euro making lows not seen since 2003 this week. The Japanese yen is also weakening further, as are emerging market currencies. No one seems to care that the strong dollar will have a negative impact on the earnings of U.S. multinational companies. Overseas exports comprise over 50% of their profits.

Recall that when the dollar last climbed at this rate, about two years ago, investors sold stocks, anticipating the negative impact the dollar’s strength would have on earnings. They were right to do so and several quarters of earnings disappointments followed.

At the same time, interest rates keep climbing and bond prices falling. The U.S. Treasury ten-year note is now yielding 2.60%. That is a huge jump from 1.6% in a matter of weeks. At some point, that yield, if it continues to climb, may spell trouble for stocks. I would guess that if that yield would hit 3%, equity investors might start worrying about the impact those higher rates could have on the economy.

Gold bugs are getting decimated, as well, as this rally continues. After out-performing almost every other asset class in the first half of the year, bullion has now dropped to $1,126/ounce from a high of over $1,350/ounce in spot gold during the spring and summer months. Other precious metals such as silver, platinum and palladium have had similar price declines.

From my vantage point, it seems clear that traders are bound and determined to ring in a Dow 20,000 before all is said and done. That should not be hard to achieve, since we are less than 100 points from that index price level. Technically, there is no real significance to that number, but the markets are often drawn to round numbers like that.

I say ‘party on’ if that is where we are going. Some call it ‘animal spirits’. I call it greed and right now the markets are in its throes. Would I put new money to work at this level—not on your life. Instead, I am taking some profits in areas that exhibit the most extreme price action. For most investors, I would just sit tight and watch the show.

Posted in A Few Dollars More, At the Market