And They’re Off!
December 7, 2015
One of the most exciting times in a big time horse race is when the horses and jockeys are about to enter the starting gate. Each horse is gently coaxed into its starting stall. Some are easily led while others jerk and refuse to go in but all are aware of what is to come. Spectators anxiously wait for that release of power when the starter rings the bell, and the horses burst onto the track. These moments are loaded with tension.
This week’s action in the market reminds me of the moments prior to the start of a major horse race. The big market event coming up will take place on Wednesday, December 16th, when the Fed will announce what they are going to do about interest rates. The market believes at around 2 pm on that date the Fed will ring the bell, and the long-awaited rise in interest rates will begin. The market will react to the Fed’s statement, and we will witness the start of a new phase in the interest rate cycle.
Not since June of 2006 has the market seen the Fed raising interest rates. That’s nine and a half long years ago! Is it any wonder that the market is so on edge? There are many investors, as well as young Wall Street professionals, who have never managed money while the Fed is in rate-raising mode.
The jobs number that came out this past Friday was what convinced the market that the Fed will finally raise rates. By most measures the job market in the US is doing just fine. Over 509,000 new jobs having been created in the last two months. The details show that the growth in jobs is across all sectors. Manufacturing, construction, service, and the retail sector are all adding new workers. Meanwhile the unemployment rate held steady at 5.0%. How many remember when it hit a high-water mark of 10% in October of 2010?
Market participants should also remember that it is never one and done on the part of the Fed. The march to zero rates was achieved through a series of reductions. The reverse of that strategy will likely be a series of incremental rate increases, with the expected change this week just the first of several. Policymakers are predicting that once the Fed starts increasing rates there could be two to four more increases in 2016 alone.
So we watch and wait for the race to begin. How will investors react to the starter releasing our horses, and the announcer’s cry of “And They’re Off “? Volatility will certainly remain high as issues in the US economy conflict with what the Europeans continue to face. All signs from OPEEC last week point to continued uncertainty in oil markets and price movement. This is the first time in a few years that the traditionally quiet holiday season for the markets may prove unstable.
Carl Gambrell
