Most investors are expecting a relatively uneventful Fed meeting today. The general thought is a potential rate hike will be punted to December's meeting.
To be clear, any indication of rate hikes this year should trouble equity investors. For those with short-tem memories, the last Fed rate hike on December 16, 2015 triggered a big selloff in stocks. The S&P 500 fell -10.5% from the Fed meeting to the February lows. Lackluster U.S. economic data didn't help matters.
Meanwhile, bonds rallied. The yield on the 10-year Treasury was at 2.3% after the meeting. It fell throughout 2016 to its July low of just 1.32%. While yields have made a comeback to 1.81% on renewed rate hike fears, it is still down -20% year-to-date.
Here's what we think. If the Fed makes its second policy blunder by raising interest rates into an economic slowdown, it could help perpetuate the next leg down in stocks. And another rally in Long Bonds. Here's a quick look at some key data that's been reported since last December.
- GDP: Year-over-year GDP growth has fallen from 3.3% in March 2015 to 1.5% today.
- Jobs Market: Year-over-year jobs growth is 1.7%, down from the peak of 2.3% in February 2015
- Aggregate Weekly Hours: Private sector year-over-year has declined from its 2015 peak around 3.5% to 1.05% today
- Durable Goods (Ex-Defense & Aircraft): Negative at -0.2% YoY. This marks the 6th month of negative growth in the last 7 months and the 15th month of negative growth in the last 17 respectively.
- Industrial Production: Growth was negative for the 13th consecutive month at -1.03% year-over-year. That makes it the longest non-recessionary losing streak ever.
- Productivity: At a 40-year low.
The newly hawkish Fed has been selling its own narrative. Here's a line from its September meeting minutes:
“Growth of economic activity has picked up from the modest pace seen in the first half of this year.”
Okay. To them, the case for a rate hike has "strengthened." Many investors apparently believe it. The market's latest expectations for a Fed rate hike puts the probability at 68.8% in December (just 14.5% today).
These expectations have been kind to Financials (XLF). They were up 2.3% in October, as investors bet rising rates would help bank profitability. That's a tremendous move in just one month.
Guess what? It could all come undone if the Fed raises rates.
Remember, our call is that the Fed would be raising rates into a slowdown ... as all of the previously mentioned economic data continues to slow. Before the Fed pivots back to dovish again (which would mark their 8th hawkish-dovish pivot in the past year), Bonds would rally and stocks would tumble. That's why we're sticking with our market-leading investment conclusions on U.S. #GrowthSlowing.
