This Time, the Signs Are Obvious to All

29.07.2016 • Investing

From Port Phillip Publishing (Australia)-

The US Federal Reserve concluded a two-day meeting overnight.

The outcome? The Fed may (or may not!) raise interest rates between now and the end of this year.

According to the Financial Times:

The Federal Reserve held open the prospect of a second increase in interest rates later this year as it said that near-term risks to the US economy had diminished and the job market recovery had regained momentum.

So, everything is hunky-dory then, right?

Not so fast. Our colleague, Greg Canavan, wrote an excellent essay in The Daily Reckoning today on the Fed’s moves, non-moves, and general pronouncements.

You can read it here. But here’s a snippet:

The Fed thinks the economy is recovering and makes noises about raising rates at some time in the future. The market reacts to this by adjusting prices of various financial assets, which is sort of a de-facto tightening.

Stocks sell off, a few pieces of economic data come in weaker than expected, and so the Fed gets all nervous about its tightening path and tells the market it will hold off for a while.

This good news is applauded, stock prices rise, and financial markets loosen up.

The Fed then thinks: “Hey, things aren’t too bad actually. Maybe we need to tell the market to settle down and get a rate rise back on the table.”

Which is what they’re trying to do again now, albeit very tentatively. So tentatively, in fact, that the market barely reacted. Investors are calling the Fed’s bluff.

That, my friend, sums it up perfectly. And it’s precisely why I’m cautious about this market. US stocks may very well be trading near record highs.

But what is the catalyst that’ll make them go higher? An improving economy and upturn in the global outlook? Sorry, we don’t see that.

We’re with Greg. The markets have behaved the way they have purely based on comments from the Fed about plans to raise (or hold) interest rates.

It’s as simple as that. If you’re buying stocks, we recommend doing so with extreme caution.

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