Why This Bull Market Could Be On Its Last Legs
Yesterday, the Federal Reserve decided to keep the federal funds rate at 0.25%-0.50%. Since then, markets have soared as investors celebrate the continuation of easy money. However, the Fed also fairly clearly telegraphed a rate rise on December 14th. In addition to saying that the case for raising rates had “strengthened”, three members of the committee dissented from the decision, arguing that the Fed should raise rates now. The headline of today’s WSJ is “Fed Makes Case for Year-End Hike”. Futures markets are placing a 59% chance of an interest rate hike in December.
This is extremely important because this has been a Fed-fueled bull market. Ever since 2008, the Fed has taken extreme, and never before tried, methods to prop up markets and the economy, including three doses of quantitative easing. As that stimulus begins to be slowly removed, it could be lookout below for stocks and other financial assets. Advisor Jim Stack has written in his Investech newsletter a number of times that this might one of the most interest rate sensitive bull markets in history.
While this bull market continues to defy expectations and prognostications of its demise, 2017 may well be the year the music stops. Short term investors may want to party on until the last minute but I prefer to clean house ahead of time. I was early in selling stocks last August but we have not missed much. In my opinion, this is one of the most interesting economic times to be alive – and that is not necessarily a good thing. In economics, as Henry Hazlitt wisely wrote, the trick is to judge policies not only by their effect on one group but on all groups, and not only by their effect in the short term but in the long term as well. Keynes famously quipped that in the long term we’re all dead. We may be about to find out who was right.
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Bay Area, CA
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