The week of May 9th I was in attendance at a national investment conference called SALT. I met one-on-one or sat in group presentations with many prominent money managers, strategists, and politicians. I thought I would share with you what their thoughts were along with my counter thoughts. Please note that their opinions are not necessarily the same as mine.
It seemed almost everyone was of the opinion that interest rates would stay lower for longer and that if the Fed did move rates in June it would not be until after the election. Many felt the interest rate move would only be slight and that the Fed would then have to reverse course within two years when the next anticipated recession would hit. Many thought the expansion had been going on for too long and that we were due for mild recession. Many, it seemed as well, were near term bearish on the stock market and long term did not feel the market would average much more than 5-7% annually for the next 5 to 10 years. These are, of course, all opinions as no one can predict the future.
All of this does not sound very positive. It is also very confusing because we currently have low unemployment with increasing wages. Historically, that has been a reason for the Fed to raise interest rates and historically that has meant a good economy.
Why do they think the Fed is on hold then?
There are three reasons I came up with:
1. It is better to raise rates too late than too early as it is much harder to reverse course if they are wrong.
2. We are in an election year.
3. It seems the Fed added a third mandate which I think is to protect the global economy and keep our currency weak.
I believe we currently have wage inflation due to a fully employed workforce and the FED should act sooner than later to raise rates. I also like to take a contrarian view— this is typically when everyone thinks one way and the opposite tends to happen. But let me be clear, trying to predict interest rates is a fool’s game.
Why were so many people bearish on Stocks?
There are, I believe, a few reasons for this as well:
1. We are in uncharted waters. Interest rates in the U.S. have never been this low for this long before.
2. The manufacturing of earning by borrowing money on the cheap to buy back stock or to buy a competitor is running its course.
3. If wages continue to rise but prices of goods cannot be increased then there will be pressure on bottom line profit margins.
4. Based on current earnings reports the market may be overvalued.
To add further confusion to all of this I believe the U.S. economy is doing alright. It is growing slowly which I think is fine. I feel the U.S. consumer is consuming a lot and continues to increase consumption; however, the U.S. consumer is consuming differently than before and the government statisticians may be missing this point. It would appear that the consumer is becoming more about consuming experiences than about consuming goods. It seems people would rather have nice vacations, meals, or sit in a coffee shop or bar than go out and buy a computer or sofa. This type of spending tends to show up more in the summer months. We, therefore, could be surprised to the upside on the economy as higher wages combined with full employment combined with the savings on fuel costs could spur a large spending spree. And again, that spending spree will probably be more on vacations and restaurants than washing machines and clothing. While this may sound good for earnings, it will also put pressure on the Fed to raise rates which is normally not good for stock prices—caution is wise as more dips in the stock market may become the norm.
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