We view the Fed’s inaction as positive for stocks. The only negative that we could see as a result of yesterday’s announcement is that the ongoing concern about a rate increase will dog the U.S. market for a few more months. That said, we doubt that the market will see a rise in rates as a continuing significant problem as time passes, because “news fatigue” will set in. We believe that U.S. interest rates will rise by December or early 2016, but we also note that the Fed’s internal estimates of the level of interest rates in December 2016 and December 2017 have both fallen, and voting members of the Fed see little inflation until 2018, when inflation is projected to reach 2 percent. The season for market corrections continues, but will soon draw to a close. We have been gradually adding to stock positions recently in expectation of stronger growth in the U.S. and the U.S. dollar, which for the last 3 months has not risen in value. Both stronger growth and a less rapidly rising dollar will aid in the improvement of corporate profits and provide an impetus for higher stock prices.
Federal Reserve Action Yesterday
The much-awaited action by the Fed yesterday was… no action. The Fed mentioned that they saw no reason to raise interest rates at this time. They went on to say that the majority of voters on the Fed agreed that rates would rise before the end of the year. They cited a gradually improving and slowly growing U.S. economy, with a rate of growth slightly above 2 percent for the first half of 2015. We and many others believe that the U.S. economy is strengthening, and we expect that economic growth to exceed 3 percent in the second half of 2015.
The only negative that we could see as a result of yesterday’s announcement is that the ongoing concern about a rate increase will dog the U.S. market for a few more months. That said, we doubt that the market will see a rise in rates as a continuing significant problem as time passes, because “news fatigue” will set in. How will news fatigue work? For example, Greece is having an election this weekend and no one cares. We remember how everyone was fixated on Greece a few months ago. The crisis passed, and the media frenzy has dissipated.
We believe that U.S. interest rates will rise by December or early 2016, but we also note that the Fed’s internal estimates of the level of interest rates in December 2016 and Dec 2017 have both fallen, and voting members of the Fed see little inflation until 2018, when inflation is projected to reach 2 percent.
Two other points: the Fed mentioned that economic volatility in emerging markets, including China, and the big decline in commodity prices in recent weeks, had both influenced their decision to slightly delay the rise in rates.
Our summary: Positive for stocks. The season for market corrections continues, but will soon draw to an end. We have been gradually adding to stock positions recently in expectation of stronger growth in the U.S. and the U.S. dollar, which for the last 3 months has not risen in value. Both stronger growth and a less rapidly rising dollar will aid in the improvement of corporate profits and provide an impetus for higher stock prices.