We continue to hear from folks that are worried about the Fed hiking rates by 25 basis points in December. Here are my thoughts on this:
A rate hike of 25 basis-points is very small. By itself, it doesn't change much in the way of lending. For me, the problem isn't a small rate hike; it’s only if the Fed hike rates for all the wrong reasons.
Last December, Yellen & Co hiked rates from zero, mostly to prove their independence from Wall Street. Many believe that the Fed is in the pocket of the Street, and the only reason why stocks are higher. If that were true, all stocks would be up by the same percentage amount. However, all stocks would be up; of course, thousands are lower. In Japan where the Bank of Japan ( BOJ )actually buys stocks via Exchange-Traded Funds (ETFs), the Nikkei 225 is getting slammed-our Fed doesn't buy stocks directly (or indirectly), but the timing was completely wrong.
In fact, the Federal Reserve has missed numerous windows where a rate hike would have been applauded. And now, they are behind and playing a dangerous guessing game.
I keep writing that good news will be good news because it allows the Fed to hike rates for the right reasons. If they are hiking while wages are flat and the Gross Domestic Product ( GDP) is sub-par, then it underscores a monumental misunderstanding of Main Street. The market will tank, and bears will say it’s about the hike itself.
Right now, even doves have become hawks. It makes you wonder because even the better-than-expected GDP report was paced by a one-off such as a soaring demand for soybean exports.
Keep Long-term Vision & Goals In Mind
There are bears, and there are curmudgeons that have one thing in common- they’ve missed the rally that’s lifted equity markets substantially higher since January 20, 2009:
- Dow Jones Industrial Average +120%
- Standard & Poor’s 500 +150%
- NASDAQ Composite +239%
Bottom line: there were people that said the market would crash once the Fed announced an end to quantitative easing (QE), a program to buy U.S. debt and mortgage debt in an effort to free banks to lend money - the market didn't crash.
There was the talk of a market crash when the last of QE was removed-still, the market didn't crash.
Investors are always eager to attempt to pinpoint market tops (and bottoms). The focus should be on individual opportunities for long- term wealth appreciation.
Actual good news would be that the economy is doing better. It would provide a cornerstone for corporate profits that is the building block of markets that are moving higher.
We’ll cross this bridge when we get there. If there is a pullback on a rate hike, I would view it as the crowd making a gigantic mistake and would be an aggressive buyer on dips.