The Fed did not listen to me and leave rates unchanged. They hiked .25%, as was widely expected in more learned circle. I thought that Yellen and Company would fear being blamed for either a massive stock market sell-off or recession, both of which we may still see.
The New York Times saw the Fed move the next day as “ALL SYSTEMS GO,” proclaiming “Shares Rise As Wall St. takes News In Stride.” And, shares did rise Wednesday when the rate hike was announced, with the Dow Industrials climbing 224 points, the Transportation Index 136 and the S&P500 30.
However, Thursday and Friday wiped out Wednesday’s gains and then some. For the two days, the Industrials fell 620 points, the Trannies 323 and the S&P500 67. Making the situation look even worse from a technical view, the Trannies closed at a new low for the year. So much for The Times enthusiastic endorsement of the Fed’s rate hike.
The New York Times, though, was not alone in praising the Fed’s rate increase. “Markets rally strongly to embrace Fed’s rate increase” headlined the UK’s Financial Times lead article for Friday, December 18.
“Global markets embraced the end of the zero interest rate policy era in the US, sending international stocks higher and quelling fears that investors would recoil at the prospect of higher interest rates.”
The FT, though, was reporting on global markets, not US markets.
Of course, markets in Germany and Japan should delight in the dollar being made stronger with the rate hike as both countries export to the US, and the euro and the yen were just made weaker, enhancing German and Japanese exports. Still, those praises were premature as global markets suffered huge sell-offs Friday.
As this is written, stock market movements are minimal, as investors seem focused on the Holiday Seasons. January should give some idea of how fast stocks will sell off, or if they will continue to trade as these lofty levels. However, punching out new highs will be difficult as the Dow Jones Transportation Average is sending a strong negative signal as it is trading near its recent new low.
As for the impact of the rate hike on the economy, that will take longer to discern. The markets are where we will see the action. In case you missed it, Marc Faber proclaimed the Fed hiked rates at “precisely the wrong time.”
If stocks sell off, that will drive investors to gold and silver, both of which are tremendous values compared to stocks. If signs of a recession show up, the Fed will reverse field. Maybe not lower interest rates but be more “accommodative,” and that will bring new investors to the metals.