Markets stabilized yesterday and are rallying today as the Fed did what they have done now for roughly nine years … NOT raise interest rates. The Fed Funds target of 0-.25% remains where it has been since the fall of 2008, with market pundits – many of whom practically guaranteed a March increase, and then a June increase – now looking towards the inevitable September increase.
At The Bahnsen Group, we assign a 30% probability that the Fed raises a quarter of a point in September, much lower odds than consensus. In fact, we assign only a 60% chance that they raise at all this year.
The timing of the first quarter point hike, whether it be September, October, December, or 2016, is truly not that important. At whatever point the “gradual” increases commence, we believe the bigger impact will come if and when rates rise to the “sudden” phase of rate increases (to borrow the paradigm that Jeffrey Gundlach uses).
Along the way, we are mystified by market participants who believe this is GOOD for markets to delay the inevitable, thereby guaranteeing a more sudden paradigm in the future. Earlier = more gradual to come; later = more sudden to come. No matter what short-term market volatility this whole discussion creates (today it is upside volatility; another day it will be the opposite), we are focused on our five beliefs about this whole crazy deal that is rate abnormalization seven years after a crisis with unemployment at 5.5%:
- Always expect them to be late, not early.
- Increases from present levels are surely inevitable.
- Be wary of the asset classes most susceptible to frothy behavior in the present rate environment.
- Look for the easy money to eventually become inflationary and force as policy reversal that becomes recessionary.
- Take advantage of that when it happens.
In the meantime, we await September, and look forward to the [dollar] or [Europe] or [GDP] or [Q1 weather] reasons that a hike is delayed yet again. Or will we finally return on a path to normalcy in September? We give it a 30% chance.
David L. Bahnsen, CFP®, CIMA®
Chief Investment Officer
The Bahnsen Group, HighTower