I’m not over last week. Neither is the financial press, and neither are you, whether you like it or not.
You don’t have to question the investments you hold, though. Nor should you try to soak up all the information thrown at you.
And whatever you do, ignore your TV, and CNBC in particular. I truly hope this doesn’t need any further explanation beyond “Gartman is the worst.”
If you don’t know who he is, you are living in an exceptionally better and more fulfilling world than I am.
Regardless of your investing experience, selectively reading smart analysis introduces us to perspectives and information we may not have otherwise considered. Sometimes, our assumptions are no longer valid or were wrong from the start.
For this reason, even the best and brightest professors, traders, and fund managers are constantly listening to each other, if only through reading each other’s blog posts. It is a strong habit for excelling in any field.
That brings us to the two perpetual sources of speculation and worry out there that I want to punch giant holes in, right here and now.
The first, renewed concerns over a Fed rate hike, will include some of the actually useful views out there from the last couple days.
The second, how a rate hike will hurt investors, we’re just going to straight out disprove. There is a lie at the heart of this that is being fed to mom and pop investors, and it really has to end now.
The Endless Guessing Game
There is a widespread call (yet again) from people poised to make ungodly sums of money by perpetuating even slight advantages for the extremely wealthy from central bank manipulation.
Larry Summers and Ray Dalio (amongst many others, especially TV talking heads) blasted out calls that claim that last week’s ruckus is a clear sign the market isn’t ready for any action from the Fed.
Let’s ignore the fact that if a Fed funds rate increase from 0.15% to 0.4% breaks the bank for companies as interest increases trickle across different forms of debt, we were cruising straight into a bear market anyways.
Instead, let’s look at why it is a good thing with a couple perspectives from much cooler heads in financial news:
In an Op-Ed for the New York Times entitled “Show Some Spine, Federal Reserve,” William Cohen called them out1:
The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.
The only way to return the assessment of risk to something resembling normalcy is to stop the manipulation. That requires nothing less than serious intestinal fortitude from the Fed and a willingness to raise interest rates in the face of determined opposition from Wall Street.
Few — if any — could put it better, between the title and these paragraphs.
In a perfect world, the Fed wouldn’t have to raise rates to prove to the world that it could raise rates.
After the taper tantrums of the last couple years and last week’s market movement, it is clear that the major market players are willing to self-immolate in the short term to get their way, regardless of any other consideration.
It is some next-level, blatant manipulation. They are manipulating the manipulators and trying to show everyone who’s the boss.
A key aspect of this isn’t just to make the market look shaky, it is to drag everyone else with them. Professional long-term investors and retail investors alike have been shanghaied.
As Josh Brown, a.k.a., the Reformed Broker, points out2:
The data still says “go,” and, “I think we’ve already paid for it in blood and tears and the market is fed up (pun intended) with the whole will-they-or-won’t-they drama of the last 9 months.”
Even Reuters notes that other central banks are getting sick of this, even though they’ll have to play along and potentially suffer as a result3:
In private and in public at last week’s global central banking conference in Jackson Hole, the message from visiting policymakers was that the Fed has telegraphed an initial monetary tightening and, following a year-long rise in the dollar, financial markets globally are as ready as they can be.
Agustin Carstens, the top Mexican central banker, is on board, in spite of growth headwinds that may result when Mexico inevitably has to raise rates alongside the Fed:
“If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more important that unemployment is falling and the economy is recovering. For us, that is very good news.”
Forget all the bickering on TV, there are cooler heads out there who want to get it over with, and they have compelling arguments. Grow a spine, stand in defiance of pundits and self-serving misinformation, and get this done so we can move on.
We’ll take care of ourselves, and if we can’t, the Fed won’t. All it can manage to do is be an enabler for unstable — and unsustainable — economics and markets, anyways.
The Lie You Need to Unlearn
The second lie that we’ll look at is how a rate hike is only going to hurt investors, especially small investors who have retirement accounts in need of any help they can get.
There is this perception out there that rate hikes will hit the core holdings of 401(k)s and IRAs, with pure growth plays having the easiest path forward in a rising rate environment.
In a nutshell, the more an investment depends on yield, the worse it will perform. Bonds are worse than dividends, which are worse than growth stocks.
That, as you may now be guessing, is absolutely wrong.
Using interest rate movements via 10-year U.S. Treasury month-to-month yield changes since mid-2006, the S&P 500 index, and the Vanguard Dividend Appreciation ETF as a proxy, there is a positive correlation with rising interest rates.
The S&P 500 showed a correlation of 24% while the Vanguard Dividend Appreciation ETF showed a correlation of 19% with changes in interest rates. Only utilities showed a negative correlation when interest rates rose, clocking in at about -10%.
These are relatively weak, but positive correlations, especially if utilities are shunned. In other words, interest rate changes are not a dominant factor in either the S&P 500 or in dividend growth stock returns.
Interest rate hikes will not hurt small traders and retirement account savers. If anything, they will only help in the long term.
Any pain in the short term will be slight, though the big players will overreact in a desperate attempt to extract as much free-debt-fueled wealth as possible before their Gatsbyesque party comes to an end.
Ignore the liars and forget the lies they’ve told you. The market is ready to bury this BS rate hike issue in the past.
Once it is done, we’ll be stronger than ever, minimizing fees, buying shares at a discount, and letting compounding interest work for us.
Source links:
1: http://www.nytimes.com/2015/08/29/opinion/show-some-spine-federal-reserve.html
2: http://thereformedbroker.com/2015/08/28/the-data-still-says-go/
3: http://www.reuters.com/article/2015/08/30/us-usa-fed-global-idUSKCN0QZ11O20150830
