Wall Street wags like to say the stock market is completely unpredictable, except for one thing -- it will always over-react. To either good news or bad news, it will over-react! The most recent example is known as the "taper-tantrum." That occurred when the Fed announced that it would slowly decrease or taper the amount of monthly purchases of government bonds during the days of Quantitative Easing (QE). The stock market promptly tanked! Of course, the monthly purchases are now zero, and the market has set several new highs since QE ended. Certainly,the stock market over-reacted!
Listening to Fed Head Janet Yellen yesterday, it is obvious that she remembers that lesson well. No interest rate increase has ever been so well-telegraphed. Is there anybody left in the United States who does not know the next movement in interest rates will be up? Why will the stock market tank when it actually happens? Because it over-reacts!
But, I think it will be a sharply V-shaped recovery. One reason is that a rate increase is already "baked-into" the stock market, which has been listless all year. Another reason is that traders will remember that Yellen is primarily a dovish labor economist, who is very concerned with unemployment, and does not want to take the chance of prolonging long-term unemployment by raising rates. They will also remember that she NEEDS to prove to the market that she will raise rates. She needs to "earn her stripes" and this is the way to do it.
She has been consistent in reminding the Street that the Fed is data-dependent, not calendar-dependent. In the past, the Fed has often had a mechanistic approach to raising rates, by raising rates a modest amount at each meeting. She explicitly rejected that approach and base decisions on the most recent data. I suspect the rate increase will be "one & done." That way, she earns her stripes, she temporarily quiets the Libertarians, she doesn't hurt unemployment too much, and she doesn't cause the dollar to appreciate too much more.
So, fear not the rate increase!
Listening to Fed Head Janet Yellen yesterday, it is obvious that she remembers that lesson well. No interest rate increase has ever been so well-telegraphed. Is there anybody left in the United States who does not know the next movement in interest rates will be up? Why will the stock market tank when it actually happens? Because it over-reacts!
But, I think it will be a sharply V-shaped recovery. One reason is that a rate increase is already "baked-into" the stock market, which has been listless all year. Another reason is that traders will remember that Yellen is primarily a dovish labor economist, who is very concerned with unemployment, and does not want to take the chance of prolonging long-term unemployment by raising rates. They will also remember that she NEEDS to prove to the market that she will raise rates. She needs to "earn her stripes" and this is the way to do it.
She has been consistent in reminding the Street that the Fed is data-dependent, not calendar-dependent. In the past, the Fed has often had a mechanistic approach to raising rates, by raising rates a modest amount at each meeting. She explicitly rejected that approach and base decisions on the most recent data. I suspect the rate increase will be "one & done." That way, she earns her stripes, she temporarily quiets the Libertarians, she doesn't hurt unemployment too much, and she doesn't cause the dollar to appreciate too much more.
So, fear not the rate increase!
