The Market has circled back around to concerns about a possible Fed rate raise and weakness in overseas economies since recovering in October, losing over 2% as of today’s writing. But recent data suggest little in the way of changes in US economic data – jobs are trudging along with a slight recent improvement, consumer spending is stable and appears to be strengthening into the holidays, and the recent fall in oil prices will be help keep a damper on inflation while supporting holiday spending.
The Recession Probability Indicator (“RPI”) most recent reading is 12, denoting a stable investment environment where the economy is supportive of continued investment with little to no current risk of recession. A growing economy is supportive of future earnings, which is a positive for the stock market.
If you are new to the RPI, it’s a tool to measure the strength of the American economy and the safety of the investment climate. It’s built on data from the Federal Reserve and has demonstrated itself to be highly effective on a historical basis.
CLICK HERE to learn more about the RPI and see an illustration of it’s potential impact on investing. Scroll down to look at the updated tables. You will be impressed.
For those interested, below is my summary opinion of current conditions and whether the Fed is going to act like Santa or the Grinch in December;
Although prices in some sectors of the market are a bit high, overall they are still within historical ranges and not in bubble territory. Many sectors are at or near fair value. If the economy appears supportive of current stock prices, why the the choppiness we’ve seen since starting November? First, the media has to talk about something to create attention and sell ads. Playing on fear is one of the most effective tools for capturing consumer attention.
Second, the Fed has been sending mixed messages for months which prolongs uncertainty — the only thing that is clear is the Fed wants to raise rates but hasn’t been able to pull the trigger yet.
Third, October was a strong month for the market and it’s perfectly normal for the market to give back some gains following a big move up. Barring nasty earnings surprises or a changing probability of recession, a pullback following a run like October gives the market time to consolidate in order to move higher in the future.
So, will the Fed raise rates in December and what will happen when/if they do?
As of today, approximately 68% of analysts and traders are predicting a raise in December. There have been few if any changes of import since the Fed declined to raise in September and inflation risks continue to muted. My opinion, right or wrong, is for rate liftoff in early to mid 2016 and no raise in December. We’ll see. If I’m going to be wrong on the Fed rate raise, December is probably the month it happens.
When the Fed does raise, be it December or later, will markets react? More than likely. However, the Fed isn’t going to raise aggressively, and the increments will be small and gradual. The decision is unlikely to impact equity markets except in the very short term.
Here is a link to the November Business Conditions Summary from the American Institute for Economic Research for interested readers—> CLICK HERE
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Chief Market Strategist
ACI Wealth Advisors, LLC.