A Market Timing Report about Fed FOMC rate changes and how they may move the various markets…
Here’s my proposed scenario:
1. The Fed insists, as Fed Gov. Bullard repeated this morning, that it wants to move off “zero interest rates,” so we’ll start with that as a given, despite the probable foolishness of that short term due to the dollar strength it will create! Maybe the Fed won’t raise rates in the end, but the scenario below still applies except that the differences would be that short rates won’t be going up as much obviously (the Fed more or less directly controls those via the Fed Funds rate) and long rates might not go down as much either.
2. Short rates rise, pushing LONG RATES DOWN. That has happened before and it will happen again if the Fed moves now. Why? There is deflation at the moment, so raising rates into deflation makes no sense. Raising short rates can pressure long rates down, because future expectations for inflation are lowered by raising interest rates in the face of deflation or very low levels of inflation.
3. The U.S. Dollar (UUP, EURUSD)? The Fed will be behind the other central banks around the world regardless, unless QE 4 appears as @KeithMcCullough said recently.
The dollar will go up on both:
A) higher short rates which will draw cash from the rest of the world seeking a short term haven above zero interest rates (or negative interest rates as in Germany) and…
B) as mentioned, the lack of a U.S. QE program, which keeps the U.S. behind the rest of the world on currency destruction.
4. Stocks (SPX, SPY, RUT, IWM)? U.S. Stocks rise as they’ve done repeatedly before on slowly rising rates. I went over that here: Rates Rise, Stocks Rally. This will happen as long as recession stays out of the picture and even slow growth continues in U.S. GDP. Stocks will weaken at times the economy/GDP appears to be decelerating of course. So we buy some more at the lows and sell some at the highs.
5. Gold (GLD)? With the dollar up and inflation still under control in the U.S., gold is pressured (after current rally is over and dollar resumes its climb). Easing by rest of world keeps it in demand though, so gold is sideways to down somewhat, after the current rally ends. Careful though: Gold will reach new lows on worldwide recovery IF that happens.
6. Treasuries and Bonds? Long rates will be lower as said, so U.S. Treasuries (TLT, UBT) and other bonds rally.
And all this changes if there is a new QE program in the U.S. Remember that the picture we are seeing is constantly changing, so we need to be willing to change our view accordingly.
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