FYI | Sep 16 2015
By Peter Switzer, Switzer Super Report
This could be a huge week for investors, with the US Federal Reserve holding all the deuces in what could be a big gamble for anyone prepared to go long ahead of the decision. And so the question you have to answer if you are toying with the idea of buying ahead of the interest rate decision on Thursday, NYSE-time, is: “Is this a sell-the-rumour, buy-the-fact situation?”
Of course, the market cliché or rule of thumb is the other way round, with smarties historically known for buying the rumour and selling the fact but there has already been the sell off.
Reversing the rule
Given this huge drop or correction from August to September on Wall Street, which we followed with our market down 16% at one stage, it makes me ask: is this a “sell-the-rumour, buy-the-fact” situation?
Morgans’ chief economist, Michael Knox, has long argued that when the rate rise comes, the market will be down for a month and up for a year! If he’s right, then even a mistimed decision in the short run is bound to be countered positively in the ensuing period.
However, given that markets often pre-empt what is expected, then maybe the recent stock dumping is the sell off that Wall Street, and in turn we, had to have. And if this is right, then a decision to raise rates this week by the Fed could actually spark a stock market surge, especially so if the associated statement from the central bank gets investors excited about the future of the US economy.
A Reuters poll in August had the majority of experts tipping a rate rise but the depreciation of the Yuan and the recent global stock market volatility has changed minds on the subject.
Former Treasury Secretary, Larry Summers, is calling for a delay and the World Bank's chief economist, Kaushik Basu has joined Christine Lagarde, managing director of the International Monetary Fund, arguing that a rate rise could create panic on markets.
That said, there are other experts, especially US economists, who think a rise is necessary and will happen and it looks like a 50:50 proposition.
Of course, it would be more ideal if China was growing confidently, as this would make the Fed’s decision a whole lot easier, but alas, we might have to wait six months before better growth news shows up in the world’s second biggest economy.
The risk factors
Making the whole story even trickier to work out is the weakness of oil prices and other commodities, which has hurt the foundations of stock market indexes. However, the Fed is always going to rattle some investors when they raise rates, so they could easily bite the bullet this week by raising by a smaller than expected amount – such as 15 basis points rather than the typical 25.
Against this was the fact that the S&P 500 had the best week since March last week and that could have been driven by the belief that the Fed will hold fire until the conditions to raise are better.
Marcel Von Pfyffer of Arminius Capital thinks the Fed will, and should, wait until March next year and the only argument I like about that is that it gives China time to prove that its growth fall is not as bad as some have been predicting.
Adding to this argument, Fed Vice Chairman Stanley has said the Fed would not ignore market volatility, while another Fed president, William Dudley, said consumer confidence was an indicator that would be important in the decision and the most recent reading saw the index come in below expectations.
Ironically, all this worry about an interest rate rise rocking markets comes as research from the Kansas Fed suggests that the US economy is a lot less interest-rate sensitive nowadays because industries, such as health and education, don’t react to rate changes like manufacturing and housing.
The former industries are more significant in modern economies, and this partly explains why quantitative easing has taken so long to bring about a US economic recovery.
For a local US man-in-the-street perspective, this is how USA Today summed up this crucial meeting: “A two-day Fed meeting that ends Thursday is a cliff hanger, with economists almost evenly divided on whether the Fed will nudge up a benchmark rate that has been near zero since the 2008 financial crisis. Those expecting a hike cite a 5.1% unemployment rate that's already below the Fed's year-end forecast and at its long-run goal. Analysts who are betting on a delay point to recently volatile financial markets and their potential effect on the economy.”
So, how do we play it?
If you’re a punter, you buy ahead of the meeting where your pay off comes if they do nothing and Wall Street spikes or they do raise but they give reasons to make investors buy rather than sell.
It would be an odd situation of “sell-the-rumour, buy-the-fact.”
The careful investor waits for the decision and plays the trend. If they raise and a sell off occurs, then we have to decide when we get in, as this could be the best big dip of the market for some time.
I’m taking this latter strategy but I know I could miss out on the first bounce if the punters collect!
Good luck with it.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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