By now you will have read or heard about the Fed minutes that were released today.
December Rate Increase Not A Certainty
While the majority of analysts and economists believe the Fed will raise rates again in December, there are several Fed Officials wondering about the need for a December rate hike. Citing persistent low inflation, mixed with the commencement of ending of Quantitative Easing, the shrinking of the Fed balance sheet should be anything but inflationary. In other words, aside from trying to return to a more “normal” interest rate environment, what would be the value in further rate hikes or certainly a rate hike in December.
Rising Interest Rates And Low Inflation Don’t Mix
It would be a rare event to see higher interest rates in a low inflation economy. If anything, it could push the economy into a recession, something everyone wants to avoid.
This could mean a slowing of the interest rate hikes that are expected for 2018. Whether it means Fed chair, Janet Yellen will not announce another interest rate hike in December, there are definite signs that further interest rate hikes may be a lot slower coming, than originally thought for both 2018 and 2019. We will have to see a lot more inflation for interest rates to return to “normal levels”.
Corporate Earnings Could Still Surprise To The Upside
In this environment of low inflation, low-interest rates and a potential for tax reform, corporations may surprise to the upside with revenue and earnings in upcoming quarters. That would mean a decline in the overall PE ratio for the S&P and NASDAQ which points to stocks perhaps not being as overvalued presently as a lot of analysts think.
The Much Anticipated Pullback
With lots of cash sitting on the sidelines waiting for the long anticipated major pullback to get into stocks, we may not see much in the way of a meaningful correction for the remainder of the year.
Staying Fully Invested In Equities
For all of the above reasons, I will be continuing to stay fully invested with my portfolio and will not be reducing the amount of capital being risked in equities for the balance of 2017. I think the chance of a major pullback in equities or a collapse in valuations is significantly reduced for the next several months. More likely, we will need to see such events as military action with North Korea or even the resignation or firing of key Cabinet members, specifically Tillerson, before we see a large drop in stocks markets.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk.
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