Thursday, December 15, 2016

0.25 and 20,000

Q. - What do these two numbers have in common?
A. - Neither really matters!

Yesterday, the Federal Open Market Committee of the Fed decided to raise short-term interest rates by a quarter of one percent.  That is the same thing they did in December of last year, when they incorrectly predicted three more rate increases in 2016, just like they predicted three more in 2017, which also will not happen.  There is always an immediate negative reaction that interest costs will decrease profits, pulling down stock prices.  However, if any company has not already refinanced their long term debt by this point, their stock deserves to take a dive.

An interest rate increase has other consequences.  With historically low interest rates worldwide, this increase will cause the dollar to strengthen, making American-made products more expensive for foreigners to buy, hurting our exporters.  Additionally, with $18 trillion in debt, a quarter point increase equals an increase in spending by $45 billion per year.  I don't recall anybody in Congress proposing such a large increase in spending?

More importantly, I think this rate increase is another long-overdue step toward normalization. where the Fed will have "dry powder" for the inevitable next recession.  That is a good thing!

Probably before year-end, we will see the Dow reach 20,000 for the first time.  It only needs to rise another 1% to reach that milestone, but would you really care if the market went DOWN a mere 1%?  It is just another number and doesn't really matter.  My concern is that it will receive a great deal of press attention, encouraging "Joe Sixpacks" to start "playing" the market.  Professionals don't like to see "dumb money" come into the market.  It is the final bit of froth before the market gets too frothy.  That is not a good thing.