||-65.21 to 16,674.74
||-5.11 to 1,990.20
||+4.71 to 4,893.95
||-0.086 to 2.217%
||+$13.10 to $1,132.10
||-$0.20 to $46.95
In the end, the Fed folded.
Rather than raise interest rates for the first time since June 2006, policymakers opted to sit tight. Not only that, but they also sounded a much more cautious tone on the global economy, the outlook for inflation and more.
Specifically, the Fed called out the fact that “net exports have been soft” in its post-meeting statement. It went on to say that “inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports” … that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” … and that it was “monitoring developments abroad.”
Sure, there was some happy talk about the domestic economy – comments that “economic activity is expanding at a moderate pace” and that “the housing sector has improved further.” The Fed also noted that the “labor market continued to improve, with solid job gains and declining unemployment.”
But those comments almost seemed like afterthoughts, especially when you factor in changes in the Fed’s forecasts. Policymakers lowered their expectations about how high rates would rise in the longer term, lowered their forecasts for future growth, and lowered their views of future inflation.
Janet Yellen and the Fed held rates steady.
In sum: I believe this was a dovish statement combined with a dovish policy move (or no move, as the case may be). Every single Fed voter went along with the decision too, except for Richmond Fed President Jeffrey Lacker, who wanted to raise rates by 25 basis points.
Markets traded all over the map in the immediate aftermath of the news, as they always are on Fed days. But after reading the statement, and listening to Chairman Janet Yellen’s post-meeting press conference, I’m left asking a simple question: What is the Fed so afraid of?
Are things so bad in the world that we can’t get off 0% a whopping seven years after the depths of the credit crisis? Shouldn’t it concern investors that the Fed is still too worried to raise rates by even a measly quarter point? How is that long-term bullish for the economic outlook, corporate earnings or stock prices for that matter?
Look, the Fed has been dragging its feet forever. Policymakers first started talking about dialing down QE back in the spring of 2013. That set off an initial “taper tantrum” in bonds, emerging markets and stocks, and it caused officials to stall for time.
Finally, in December 2013, the Fed began the process of winding QE down. Asset buying slowed from a pace of $85 billion to nothing by last October.
But even as the Fed backed off, the Bank of Japan, European Central Bank and other banks around the world continued to pile on. They cut rates, launched or increased the size of their own QE programs, and tried to devalue their currencies in order to boost inflation and exports.
That helped drive the dollar up, and hammered sectors like energy and manufacturing. Judging by the early earnings warnings we’re hearing from corporate America, those threats are getting worse rather than better.
|“A simple question: What is the Fed so afraid of?”
Meanwhile, the co-dependency of the Fed and markets has gotten so bad that it borders on the absurd. The wild swings of the past several weeks prove it. We saw many moves up and down – of several hundred Dow points — prompted by on-again, off-again talk about the chances of a hike at today’s meeting.
One policymaker would imply a hike was likely, causing markets to sell off. Then in a quick about-face because of the selloff, another policymaker would say a hike was less likely. That caused markets to surge, which in turn led to the next policymaker saying that a hike was more likely. And that, in turn, caused yet another sell off.
Talk about a circular-logic-driven market mess! Since the Fed didn’t put an end to that guesswork by starting the rate-hiking process today, it’s only going to continue for the foreseeable future.
Finally, we have seen two huge examples of the negative side effect of leaving policy too easy for too long. Easy money helped inflate the dot-com bubble, and the housing bubble … both of which were followed by huge, painful busts. This time around, we’ve seen massive speculative activity in commercial real estate. We’ve seen huge flows of excess capital into early-stage tech companies that don’t make any money. We’ve witnessed a giant surge in junk bond valuations and issuance. And we’ve observed a torrid pace of corporate debt offerings, with companies plowing that money into stock buybacks and M&A, rather than hiring and capital investment.
So to sum up: Anything can happen with markets in the very short term. Stocks fell today after we saw a decent bounce earlier this week. But beyond that time frame, I don’t believe the Fed’s non-action, or the Fed’s statement, are ultimately bullish for the real world we all live, work and invest in.
From a practical, actionable standpoint, I continue to recommend maintaining a healthy reserve of cash. I also suggest you stay on high alert about the very real risks out there, and invest only in a select group of highly rated stocks in conservative sectors. For instance, the remaining positions in my Safe Money Report are concentrated in sectors like consumer staples, pharmaceuticals and high-dividend-payers.
Lastly, this is no time to focus on traditional Wall Street malarkey. This is a time where you want to follow independent researchers and analysts who can tell you what’s really going on – and what it truthfully means for your wealth and well-being, such as those here at Money and Markets.
Now, that we have seen the Fed punt (again) on interest rates, the most important question is “Where do we go from here?” Several of you had opinions on that even before the news was released.
Reader Fred 151 said: “The problem is, no one but God really knows what to do or what not to do if you want to artificially manipulate the U.S. economy, much less the world economy. And that is the problem with having a czar trying to do just that. If the market is going up, the czar will be praised as a god. Once it starts going down big time, he or she will be pilloried.
“Just wait to see what happens to Yellen when this next big collapse comes. Her name will be, well, something worse than mud. The Soviet Union and their communist central planners tried manipulating their economy for years with no success. Why would we think our economists are any better because they went to Haaaahhhvvvvvaaaddd or Yale?”
Reader Frank E. added: “It seems that the Fed has a tiger by the tail, and it’s clearly one of their own making. I have never believed that our economy was really recovering from the ’08 collapse except in the highly inflated world of Wall Street, and this was set up by the zero interest rate deal.
“The entire world is in over its head with debt, and the central banks are now going to do what? More QE? Yeah, that really works! Mike is spot on about taking your profits off the table before they go bye-bye.”
Finally, Reader Donald L. said: “Governments cannot resist the temptation to meddle in the markets. It’s just that the Chinese, with their history as control freaks, do more of it and cause more damage, though we are working hard to catch up. The ideal solution would be to step back (depression of 1919-21), let the market flush out the refuse, and move on from there.”
Meanwhile, on the geopolitical front, Reader William L. offered this take on our fight with ISIS:
“I don’t think we should worry about ISIS or get involved in defeating it. If the countries around them don’t care to fight to stop ISIS, then they don’t deserve to survive. If they do care, then perhaps they will act to defeat the ISIS menace without our involvement.
“The issue of Putin supporting Syria is just a come-on to distract us and draw us in. He’s worried about ISIS taking over the Russian seaport and military base there, so let’s leave him to his own devices. We need to generally follow a non-interventionist foreign policy.”
Reader Chuck B. also weighed in on the regional turmoil, saying: “Turkey is the only boots-on-the-ground force with power to destroy ISIS, and they have done a bit of bombing. But they are more concerned with defeating Kurdish efforts to set up a homeland in the southeastern part of their country (and northern Iraq).
“It is a geopolitical mess over there, and our bombs can do little to prevent the Caliphate from happening. If we would try to send in the forces needed, we might find ourselves involved with the Russians, who support Assad, and have now sent in marines to protect their naval base at Tarsus.”
Thanks for offering your views. And if you haven’t shared any yet, don’t hold them in. Just head over to the Money and Markets website and let ‘er rip.
Just so you know, I agree with the idea that the Fed lives or dies by the market response to its actions. Alan Greenspan was considered a hero for “saving” the market after the Long Term Capital Management meltdown in 1998 … then treated like a goat after the Nasdaq collapse, and the housing implosion a few years later.
Ben Bernanke is considered a hero for “saving” the markets after the credit collapse in 2008. But I believe history will judge him harshly if the current QE-driven rally now falls apart. And considering he didn’t forecast the housing and credit crisis in advance, like I did, I already view him as flawed. The beat goes on.
|Other Developments of the Day
● Two more benchmark, mega-cap companies released disappointing earnings and revenue in the last day. Telecom giant Verizon (VZ) said sales probably won’t grow between 2015 and 2016 due to challenges in its wireless business. Oracle (ORCL) reported disappointing sales due to declining software license revenues and the strong dollar.
Is this a new trend for investors to worry about heading into the heart of Q3 earnings season? I think so.
● The leading Republican candidates went at it again in a debate held at the Ronald Reagan Presidential Foundation and Library in California last night. Several candidates came after frontrunner Donald Trump, while Jeb Bush and Carly Fiorina tried to cut through the clutter and gain some ground. We’ll have to see how the polling shakes out in the next few days to see who “won” in the eyes of American voters.
● General Motors (GM) is settling government criminal charges that it misled investigators about the scope and severity of its problem with faulty ignition switches. GM has paid more than $4 billion to replace switches and compensate victims of the problem, which could lead to cars being shut off while being driven.
● Merger mania continues in the cable sector, with Altice NV launching a $17.7 billion bid to buy Cablevision Systems (CVC). The offer of $34.90 represents a 22% premium to where Cablevision was trading yesterday. Altice of the Netherlands previously bought a majority stake in Suddenlink Communications for $9.1 billion.
● An earthquake struck Chile overnight, rattling the South American nation from an epicenter 177 miles north of the capital city of Santiago. The 8.3-magnitude quake killed at least eight people, and triggered widespread tsunami warnings in the Pacific Basin.
What thoughts do you have about yesterday’s Republican debate? The GM settlement with the Justice Department? The spate of earnings warnings we’re seeing? Share them at the website.
Until next time,