By Paul Note.
“I know you think you understand what you thought I said, but I’m not sure you realize what you heard is not what I meant.” “Fed Speak” was invented by Alan Greenspan in the interim period between nothing coming from Fed officials and today’s world of someone chatting nearly every day.
Judging by the market movements and various comments from Fed officials, the shrouded comments, or none at all may be a good thing! Through the communiqué after the meeting, it seems as though the Fed wants to raise rates in December.
The global markets are no longer melting down, and various central banks have also promised more liquidity in the form of “quantitative easing”, so the time seems right to get the markets ready (again) for the possibility that the Fed might raise rates in December. Given the maybe yes/no back and
forth from the Fed, many are beginning to question their credibility.
What exactly is the Fed looking at, what are the trigger points to making a rate decision and how quickly are they likely to raise rates? All these questions are getting louder after each meeting. It maybe time to bring back the Wizard of Oz.
The October rally was the best since 2011, the year that this market is most compared to historically. IF the comparison continues to hold, expect a hard decline over the next few weeks and a rally into the end of the year, with stocks up slightly from today. The frenetic rally of October looks to be losing some steam, as many more days looked much weaker than the headline averages might have indicated.
We highlighted last week the dichotomy between the largest and smallest stocks in the markets. The past week saw more stocks declining than advancing, even though the averages managed to finish higher. Volume was also decidedly negative on the week, rising more on the down days than the up ones. So, does this market follow the 2011 blueprint? Until interest rates rise, the markets will always be beholden to “free” money.
This forces investors into “risky” assets, as alternative investments provide little in the way of returns. At some point the party will end, however guessing when that will occur has meant sitting out sharp rallies like October. Each market decline has been met with more easy money. It keeps getting harder to actually pull the trigger and begin removing the money drug from the system.
October was a “risk-on” month for bond investors too. Investors flocked toward high yield and away from treasury bonds during the month. Corporate bonds were in vogue as investors once again stretch for yield and were willing to increase the risks to get that return. The relationship between “safe” treasuries and “risky” corporate bonds has implications for stocks as well.
When investors favor treasuries as they did beginning in July, stocks tend to do poorly. When investors are
willing to buy higher yielding bonds as they did through much of the first half of 2015, stocks do well. Whether October marked an inflection point between “risk” and safety” will be determined in November and could have impli cations well into 2016.
For now, bond yields look to be stable as investors wonder about the next Fed meeting. We’ll get a peak at wages on Friday with the employment report.The nearly daily swings between “risky” investments in materials, industrials and energy and the “safe” investments of utilities, consumer staples and healthcare is being keyed off Fed.
The Fed implied they would be raising rates in December and up went the “risky” sectors. As economic data came in weaker than expected, the “safe” investments did well at the expense of the “risky”. Trying to gauge the next winning sector or even asset class has been a tough one this year as stocks continue to whip around depending upon perceived changes in monetary policy and economic reports.
Technology and large US stocks are currently kings of the hill, but that is subject to change by Tuesday morning. The markets have gone sideways this year in a very interesting way. Even the performance battle between stocks and bonds (which usually favors stocks) is essentially a draw. The last two months should be interesting indeed!
As we mentioned last week, the markets need a breather and they are likely in the early phase of that, given the action of last week. Coming up will be a deluge of economic data that will be parsed to the microscopic level to determine any new information about the leanings of the Fed at their December meeting. Given the “all in” or “all out” nature of the markets over the past three months, we would expect more volatility over the next few weeks.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions
