Stop the Madness


Posted in: Economics, General, Stock Market, Thought of the Week

It’s time for us all to stop focusing on when the Fed will raise interest rates. Turn on any financial news network these days, and it seems as if these shows can’t go an hour without talking about when the Fed will ultimately move rates up for the first time in almost a decade.

The pundits and forecasters are addicted to this subject because most market watchers are under the assumption that with an interest rate hike comes volatility. The media loves volatility because more people watch the news during times of heightened market moves (oh and more people watching the news means more advertising dollars for the networks).

Interest rate hikes are almost always used as a tool to dampen inflation, which is a byproduct of a fast-growing economy. Hence, if the Fed is preparing to raise rates, then it means that inflation is rising. If inflation is rising, then our economy is growing (most of the time). If the economy is growing, then corporate earnings should be increasing. This logic trail leads to one conclusion – own equities.

For the sake of argument, let’s assume for a minute that it is possible to time such events, but our Investment Committee is just not good at it. Well then how have others’ predictions fared? Take a look at the track record because here’s the funny thing about interest rate commentary – it’s almost all wrong.

Name one market pundit, sell-side analyst, economist, or anyone else on the news who has accurately predicted the path of interest rates over the last two years. All you have to do is go back to 2014 to see that the overwhelming majority of those on TV networks and those who paid millions of dollars every year to do uber-intensive research got the call on rates dead wrong.

Now, will the Fed inject some volatility into markets when they finally raise interest rates for the first time since 2006? Probably. Maybe. Actually we have no idea. Predicting emotional responses in financial markets is a useless exercise.

However, if we see and fear induced selloff in equities, then our Investment Commitee will welcome it with open arms because they love to see stocks go on sale for absurd reasons. Stocks selling in the face of a growing economy are almost always a value investor’s dream come true.

Rather than ask yourself when rates will rise, long-term investors are better suited trying to determine how far and how fast the Fed will move over time. Meaning, the velocity of rate hikes is what really matters, and this is where our Investment Committee sees the ability to position a portfolio.

The Fed is acutely aware of the situation they have put us all in, and they know that if they were to move rates up too quickly, then they risk driving us back into a recession. Therefore, they will most likely move rates at an incredibly slow pace, especially with inflation below their 2% target, so investors should stay positioned for a low interest rate environment for much longer.

Stanley Fischer, the Fed’s Vice Chairman and second in command behind Janet Yellen, was quoted in a Bloomberg article earlier this week:

When it comes to describing how the Federal Reserve will exit the zero-rate era, “liftoff” is all wrong, says Vice Chairman Stanley Fischer.

The term, dear to investors and headline writers, “is the most misleading word you can imagine,” he said on Monday in Toronto.

“Liftoff says we’re going straight up with the interest rate,” Fischer said during a question-and-answer session after a speech on financial crises. “Well, we’re going up with the interest rate, then along, and then another little jump. That’s not liftoff, that’s crawling.”

Source: http://www.bloomberg.com/news/articles/2015-06-01/fischer-rejecting-liftoff-says-rate-rises-will-be-crawling-

The difference here is that our strategy is not predicated upon the timing of a singular market event but rather the direction over time. Said another way, we are not placing a bet on when the rate hike will occur but rather on the environment that will likely persist for years.

The bottom line is that the madness simply must end, and what makes for good TV programming typically does not align well with investment advice. The timing of the first rate hike since 2006 is irrelevant to a long-term investor, so ignore the stories in the press about rising rates because they provide no value at all.

Instead, position your portfolio to operate in a low interest rate environment because even if the Fed were to raise rates tomorrow, we are still going to be here for a while.

Read this week’s Thought of the Week to learn more about a possible interest rate hike.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.