Economic Developments Raise Upside Stock Prices, Upside Rates Also Leak

DOOM AND GLOOM IS UNLIKELY What is feared and feared? The continuation of loose monetary policy and potential further asset purchases by the Federal Reserve Bank, or QE, may give the impression of “easy…

Economic Developments Raise Upside Stock Prices, Upside Rates Also Leak

DOOM AND GLOOM IS UNLIKELY

What is feared and feared?

The continuation of loose monetary policy and potential further asset purchases by the Federal Reserve Bank, or QE, may give the impression of “easy money” and another asset price bubble, the particular concern being the never-ending run-up in the price of US bonds. Indeed, this long list of alleged bubbles and bubbles with benefits would long be mentioned by critics and critics of the Fed.

More likely, however, is the stronger US economy has become over the last several years. A good healthy US economy would give the impression of solid growth and resilience, thus reducing inflation pressures. Real wages have also increased significantly in recent years with a real year-over-year increase of +3.9%, more than 3 times the 2.2% inflation target of the Federal Reserve.

Perhaps most important, household and business spending have also increased substantially, reflected in a growth of real GDP at a strong +3.1% annual rate in Q4 2017 and nearly 4% in 2018 Q1 alone.

Positive signals from the labor market will also be valuable. A labor market nearing full employment (over 5.0% official jobless rate as reported by the Bureau of Labor Statistics) and rising wage levels – which had been lagging for several years – will be appreciated by the Fed and could motivate the Fed to move rates higher.

No matter how bullish, the market risks the negative signal of higher interest rates. A pullback of US stocks is likely.

Based on our experience, no matter how bullish the Fed would probably remain soft-spoken, considering their task to conduct a successful withdrawal of easy money without creating an asset price bubble, or, at least, future asset bubbles, later.

We believe the market will likely remain more “squeezed” between the Fed at one side, the “short of all and end of all” mantra of the Trump administration and the higher expected real interest rates with the economic recovery continuing and the looming December 2018 Federal Reserve rate hike, and higher stock prices and financial assets prices.

Currently, the short of all and end of all is a feeling among a certain segment of investors and market participants, and reflects the sizable (but modest) stock price volatility over the last six months, and the global economic and market slowdown in the second half of 2017.

We believe the recent sell-off is exaggerated, is driven mainly by the Trump administration’s self-interested thoughts, but also by investor worries of a US Federal Reserve policy tilt toward another rate hike in the end of May and to begin raising rates again in September. These worries will likely be neutralized when economic and financial indicators keep improving and when real interest rates remain lower than expected, which eventually, Trump understands, will be hard to sustain.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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