Attacks on Paris by the
Islamic State were an appalling exclamation point at the end of a difficult
week for stock markets.
World stock markets tumbled
as investors braced for a possible rate hike by the Federal Reserve in December.
Many national indices across the United States, Europe, and Asia experienced
downturns of more than 2 percent. The Dow Jones Industrial Average lost 3.7
percent and the Standard & Poor’s 500 Index gave back 3.6 percent. The
exception was Japan’s Nikkei 225, which gained 1.7 percent, largely because its
weakening currency benefitted Japanese exporters.
The
chances are pretty good the Federal Reserve will lift rates during December. A Reuters’ poll of 80 economists asserted
there is “a 70 percent median chance the U.S. central bank would raise its
short-term lending rate at its final meeting of the year...” A survey taken by The Wall Street Journal found 92 percent
of academic and business economists expect Fed liftoff in December.
Even if the Fed does raise rates, it’s important to
remember that market forces determine interest rate levels. Raising the Fed
funds rate is the Fed’s way of encouraging higher interest rates and tighter
monetary policy, but it may not have the intended affect. Crain’s Chicago
Business reported, “The Fed is moving into uncharted territory. It has
never tried to raise the federal funds rate – that is, make money harder to get
– when the banking system was flush with $2.5 trillion of excess reserves, as
it is now.”
In the U.S., investors
digested weaker-than-expected retail sales data. U.S. retail sales remained in
positive territory in October (up 0.1 percent); however, economists were
anticipating an increase of 0.3 percent. Regardless of the discrepancy, there
are signs consumer spending will remain steady through the last quarter,
according to Reuters. As a result,
retail sales data are unlikely to affect decisions being made by the Federal
Reserve.
It’s likely markets will continue
to rumble and roil next week as the world processes the horrific Islamic State
strikes in Paris, in Lebanon, and against Russia.
what will hAPPEN after the federal
reserve begins to raise rates? If the Fed’s efforts to
raise interest rates are successful, what will happen next? It all depends on whom you
ask:
Dr. David P.
Kelly, CFA,
Managing Director Chief Global Strategist, JPMorgan: “Looking back at prior Fed rate
hikes suggests that at first, investors have a tough time stomaching the idea
of higher yields. However, as it becomes increasingly apparent that the Fed is
hiking rates for all of the right reasons, markets re-price in line with their
underlying fundamentals. For that reason, it is important for investors to
prepare for a likely uptick in volatility around Fed liftoff.”
Robert C. Doll, CFA, Chief Equity Strategist,
Nuveen: “First, higher rates would likely trigger higher
bond yields, which would be a negative for Treasuries. Additionally, an
increase would likely put upward pressure on the U.S. dollar. A strong dollar
is usually a negative for oil prices… Finally, we think the combination of
higher rates and a stronger dollar could hurt U.S. companies that do most of
their business overseas.”
The Financial Times:
“Almost every asset class on the planet exhibits some evidence of frothiness
these days, but some seem more vulnerable to higher interest rates. Although
stocks look expensive, higher interest rates indicates that economic growth is
firm, and that is good for listed companies. Gold typically loses its shine
when interest rates climb, as the metal doesn’t pay any interest like a bank
account will, but has already been beaten up heavily recently. The bond market looks
more exposed.”
The
Fed is expected to raise rates slowly and cautiously. We won’t know when rates
will increase or by how much until the
next Federal Open Market Committee meeting. That meeting takes place on
December 15, 2015.
Weekly Focus – Think About It
“Terrorism [takes] us back
to ages we thought were long gone if we allow it a free hand to corrupt
democratic societies and destroy the basic rules of international life.”
--Jacques
Chirac, former French Prime Minister
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