AMERIPRISE FINANCIAL, INC.
Getting the Timing Just Right - Raising Rates too Early or too Late: Both Would be a Mistake
09/22/2015 | David Joy
Despite endless speculation about what the Fed would do at last week's meeting, it came as little surprise that it chose to do nothing. After flagging its concern over falling stock prices in China in the minutes of its July meeting, the Fed made it clear that overseas weakness would play a meaningful role in its decision making process.
The subsequent surprise in the devaluation of the yuan and the ensuing market turmoil reinforced the evolving view that the Fed would remain on hold in September. This hold disappointed some who believe that, with unemployment as low as it is, the Fed risks falling behind the inflation curve. It also disappointed those who think the Fed's uncertainty is itself causing volatility and that it should go ahead and initiate the first rate increase and be done with it.
There is Nothing Wrong with Being Patient
The economic recovery remains somewhat fragile, especially in developing markets that might be the most negatively impacted by a Fed rate hike. After years of doing the heavy lifting in nurturing the recovery, the Fed certainly does not want to risk making a mistake by raising rates prematurely. But, the Fed's inaction seems to raise the bar for when the first rate hike might occur.
Apparently full employment and inflation trending toward two percent are no longer enough by themselves. Add to those the ethereal notion of overseas stability (Ethereal because we do not know if evidence of economic stability is what the Fed wants to see or if market stability alone is enough.) And where should we be looking? Is China the primary concern or are all other geographies part of the story?
What's Next for the Fed?
It's now a safe bet that the Fed's October meeting is off the table for considering a rate hike. What could the Fed possibly learn in a little over one month's time that would convince it that conditions had changed sufficiently and sustainably enough to pull the trigger? The answer is nothing. In fact, the Fed would look foolish if it did so. So December looks like a distinct possibility right now, but only if things improve. The status quo is apparently not sufficient.
Beyond the question of simply when to raise rates, the Fed's full report showed downgraded economic expectations across the board, which has investors unnerved. The Fed lowered its expectations of economic growth, inflation and interest rates. Only the level of unemployment escaped unscathed.
Following the meeting, stock prices fell along with bond yields and the dollar. The fear is that if growth is unlikely to accelerate, and possibly slow, revenue and earnings growth, which are already challenged will become even more difficult to generate. So, we are back to watching the data. But exactly whose data, and what importance to ascribe to it, is an open question.
It seems that one implicit assumption in the Fed's action, or rather inaction, is that inflation will not be a problem anytime soon. And maybe that is correct. Certainly weakness overseas and the stronger dollar are keeping prices in check. But what about the possibility of rising wage pressure at home? So far it is not a concern, but could it become one, and perhaps more quickly than expected? Just as raising rates too soon might be a policy mistake, so too would be raising them too late.
Earnings Will Soon Take Center Stage
The third quarter is quickly coming to a close, and that means earnings will soon be front and center. According to Factset, aggregate earnings for the S&P 500 are now expected to decline by 4.4 percent in the third quarter compared to last year. This represents a deterioration of expectations from the start of the quarter when earnings were forecast to decline 1.0 percent.
Not surprisingly, the weakness is expected to be most acute in the energy sector and in companies that rely more heavily on foreign sources of revenue. For the full year earnings are now expected to be essentially flat, growing by just 0.8 percent, while revenues are expected to decline by 2.3 percent. Looking ahead to 2016, earnings are expected to recover strongly, rising 10.1 percent. Achieving this level of growth depends heavily on a recovery in the energy patch where earnings are forecast to grow by 34 percent. Full year revenues are forecast to rebound to growth of 5.5 percent, again heavily influenced by an expected rebound in energy that certainly seems at odds with the Fed's latest assessment of economic conditions.
Lastly, there was an election in Greece over the weekend. But as a measure of how far the Greek crisis has receded from the list of investor concerns, hardly anyone noticed. And that includes the Greek people, as voter turnout fell to an historic low. For the record, the people returned the Syriza party and its leader, Alexis Tsipras, to power.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
09/22/2015 | David Joy
Despite endless speculation about what the Fed would do at last week's meeting, it came as little surprise that it chose to do nothing. After flagging its concern over falling stock prices in China in the minutes of its July meeting, the Fed made it clear that overseas weakness would play a meaningful role in its decision making process.
The subsequent surprise in the devaluation of the yuan and the ensuing market turmoil reinforced the evolving view that the Fed would remain on hold in September. This hold disappointed some who believe that, with unemployment as low as it is, the Fed risks falling behind the inflation curve. It also disappointed those who think the Fed's uncertainty is itself causing volatility and that it should go ahead and initiate the first rate increase and be done with it.
There is Nothing Wrong with Being Patient
The economic recovery remains somewhat fragile, especially in developing markets that might be the most negatively impacted by a Fed rate hike. After years of doing the heavy lifting in nurturing the recovery, the Fed certainly does not want to risk making a mistake by raising rates prematurely. But, the Fed's inaction seems to raise the bar for when the first rate hike might occur.
Apparently full employment and inflation trending toward two percent are no longer enough by themselves. Add to those the ethereal notion of overseas stability (Ethereal because we do not know if evidence of economic stability is what the Fed wants to see or if market stability alone is enough.) And where should we be looking? Is China the primary concern or are all other geographies part of the story?
What's Next for the Fed?
It's now a safe bet that the Fed's October meeting is off the table for considering a rate hike. What could the Fed possibly learn in a little over one month's time that would convince it that conditions had changed sufficiently and sustainably enough to pull the trigger? The answer is nothing. In fact, the Fed would look foolish if it did so. So December looks like a distinct possibility right now, but only if things improve. The status quo is apparently not sufficient.
Beyond the question of simply when to raise rates, the Fed's full report showed downgraded economic expectations across the board, which has investors unnerved. The Fed lowered its expectations of economic growth, inflation and interest rates. Only the level of unemployment escaped unscathed.
Following the meeting, stock prices fell along with bond yields and the dollar. The fear is that if growth is unlikely to accelerate, and possibly slow, revenue and earnings growth, which are already challenged will become even more difficult to generate. So, we are back to watching the data. But exactly whose data, and what importance to ascribe to it, is an open question.
It seems that one implicit assumption in the Fed's action, or rather inaction, is that inflation will not be a problem anytime soon. And maybe that is correct. Certainly weakness overseas and the stronger dollar are keeping prices in check. But what about the possibility of rising wage pressure at home? So far it is not a concern, but could it become one, and perhaps more quickly than expected? Just as raising rates too soon might be a policy mistake, so too would be raising them too late.
Earnings Will Soon Take Center Stage
The third quarter is quickly coming to a close, and that means earnings will soon be front and center. According to Factset, aggregate earnings for the S&P 500 are now expected to decline by 4.4 percent in the third quarter compared to last year. This represents a deterioration of expectations from the start of the quarter when earnings were forecast to decline 1.0 percent.
Not surprisingly, the weakness is expected to be most acute in the energy sector and in companies that rely more heavily on foreign sources of revenue. For the full year earnings are now expected to be essentially flat, growing by just 0.8 percent, while revenues are expected to decline by 2.3 percent. Looking ahead to 2016, earnings are expected to recover strongly, rising 10.1 percent. Achieving this level of growth depends heavily on a recovery in the energy patch where earnings are forecast to grow by 34 percent. Full year revenues are forecast to rebound to growth of 5.5 percent, again heavily influenced by an expected rebound in energy that certainly seems at odds with the Fed's latest assessment of economic conditions.
Lastly, there was an election in Greece over the weekend. But as a measure of how far the Greek crisis has receded from the list of investor concerns, hardly anyone noticed. And that includes the Greek people, as voter turnout fell to an historic low. For the record, the people returned the Syriza party and its leader, Alexis Tsipras, to power.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
|
distributed by
|
