Every other week we plan to ask a selection of our contributors for their opinion regarding what we believe are some of the most pressing market-focused questions of the week. This week we wondered:
After Wednesday's release of the FOMC minutes solidified expectations of rising rates, where do you think equities and/or the US dollar are headed? Care to hazard a guess on the number of times the Fed will hike in 2018?
James Picerno
I'm mildly positive on the outlook for US stocks, although I'm expecting that it will be a slow grind higher for the foreseeable future. A critical hurdle I'll be watching is whether the S&P 500 can regain former heights reached last month. The all-time record close of just below 2873 on January 26 is a key number. Until or if the market can move above that peak, there's a case for arguing that a trading range will prevail for the near term. Nonetheless, a moderately bright economic trend in the US will keep optimism bubbling. The relentless uptrend with low volatility that prevailed until recently, however, is probably history.
Meanwhile, it remains to be seen if the bearish trend in the US Dollar Index that's been in force for much of the past year has run its course. The benchmark has been consolidated in recent weeks in 88-90 range. For the moment, this appears to be a floor. But before the dollar bulls can convincingly announce the "all clear" signal for the greenback, we'll need to see the US Dollar Index break above 90 on a sustained basis.
Perhaps another rate hike by the Federal Reserve, which is expected for next month's FOMC meeting via Fed funds futures, will do the trick.
Boris Schlossberg
The FOMC is clearly gearing for 4 rate hikes this year, but events may force them off that path. The rise in rates has obviously spooked stocks which are fearful of competition from bonds now. Furthermore, the higher the yields go the more P/E compression we will see. So that even if profits perform on par, actual prices will decline as P/E ratios move closer to 15 rather 20.
The only unabashedly bullish scenario is one where US GDP growth exceeds 3.5% or better, in which case the upward momentum in rates will be offset by growth in equities. I find that the least likely scenario to play out, though its hard to tell because no one knows the stimulative impact of the tax cut.
Overall the most likely scenario is for much bigger volatility. What we saw in January is only a preview of things to come.
Joseph L. Shaefer
Capital flows where it is most welcome. One side of the American welcome mat says "Unless illegally obtained, your money is safe from confiscation here..." The other side, in times of rising US rates and static rates elsewhere, says "... and we pay a higher interest rate than the competition." These two factors augur for a rise in the beaten-down US dollar.
Will equities follow? I imagine we will see a rebound from the current correction after a short period of backing and filling. Does that mean we are off to the races again? I don't think so. Expectations for significant earnings gains are so high that any stumble will likely result in a fall. At some point, possibly as early as this spring or summer, I expect a significant correction. Our trailing stops will be tightened as the weeks go by.
The Fed says they will raise rates only three times in 2018. I think that is most likely. Combined with their policy of not purchasing new Treasury bonds when those in their current bloated portfolio mature, that's plenty.
While most investors are focused on the number of times rates are raised, the real story is how many billions of dollars of Treasury bonds need to be taken by individuals and institutions to make up for the Fed not buying them.