Stocks skipped higher Friday, closing a choppy, albeit positive, week. The indexes continue to jump, dip and swoon amid gusts of uncertainty emanating from the pending Fed decision. Today's markets resemble the protagonist from the book, Sybil. Hundreds of personalities clamoring to be heard. Leaving investors to ponder the true identity. Seeking for clues of future intentions.
Futures markets indicate a 30-percent chance of a rate hike when Yellen & Co. meet this Thursday. We'd rather see it over and done. As a postponement till October or December simply locks in further uncertainty.
Will the Fed or won't the Fed?
Should the Fed begin to lift rates, investors might wish to avoid companies with large amounts of floating-rate debt. Which includes companies like General Motors, Coca-Cola, eBay, Allergan and Monsanto.
Meanwhile, stocks will fortress-like balance sheets typically perform well when rates increase. So, Apple, Chipotle, Dollar Tree, Pepsi, Oracle and Wells Fargo could do well. We also like the regional banking stocks, as rising rates provide more favorable net-interest margins. And so, more profits.
U.S. corporate leaders have established the full-court press against a near-term rate lift. Because they're worried about slowdowns overseas, and the impact on U.S. earnings moving forward. Some academics and former government officials have joined that effort. Odd bedfellows, eh?
Former Treasury Secretary Larry Summers called a rate increase now "a serious error that would threaten all three of the Fed's major objectives: price stability, full employment and financial stability."
The IMF's Christine Lagarde warned the Fed to measure thrice and "cut" once: "The IMF thinks that it is better to make sure the data are absolutely confirmed".
A Financial Times Op-Ed advised, "The Fed should sit on its hands next week".
Our only axe to grind? Future revenue degradation. Corporate revenues are not exactly swimming in the juices of a high-growth economy.
In June, analysts thought the 30 Dow companies would post 2016 sales growth of 2.7 percent. Today? Down to 1.2 percent. And as opposed to postponing their anticipated sales bumps, analysts are beginning to trim top-line estimates for 2016. Where those were 5 percent in August, they stand at 3.1 percent today. Moreover, analysts have begun to steer down their 2016 expectations. And if that's the case, why would corporate America begin to gear up for a big year? Why hire that extra salesman? Programmer? Administrator?
Which is why the Fed may consider leaving rates unchanged. Perhaps into 2016. The animal spirits they've so worked to encourage remain absent. Scared of capital market volatility. Bad Asian economics. Unsettled oil prices.
Today, a wide number of blue chip stocks trade for bargain prices. While paying dividends north of three percent. Wal-Mart. Caterpillar. Aflac. Chevron. ExxonMobil. Amex. Consolidated Edison. Each offers solid value and juicy income streams to patient investors. Any Fed-based volatility this week could set the stage for further opportunities.
Still, many will ignore them. As we tend to pay far more attention to the negative, fear-based stories that dominate the headlines. Psychologists refer to this tendency as the "negativity effect." This encapsulates human's negativity bias, whereby negative items tend to have a greater impact on our psychological state than do neutral or positive items. So, unpleasant thoughts, emotions and events exert a more dynamic impression upon our risk considerations and decision making than do pleasant thoughts and activities.
Accordingly, even as sound investment opportunities present themselves, investors continue to dwell upon prior crises. Resulting in a residual aggregation of opportunity costs, as negativity bias leads investors to sit still as opposed to pursuing opportunities.
So what bogeyman is currently scaring investors? China.
Despite what you hear from the financial media, the Chinese economy has little direct connection to the U.S economy. Former "permabear" David Rosenberg, chief economist and strategist at wealth management firm Gluskin Sheff, explained in a recent article in Canada's Financial Post:
"This gets very little attention because the media and Wall Street analysts know full well that bad news always sells better than good news -- take this from a former bear.
China's economy has a grand 16% correlation with the U.S. economy, knock-on effects and all. In other words, it's insignificant, though there are some sectors such as automotive and scrap steel that are affected.
China represents the grand total of 0.7% of U.S. GDP..."
Rosenberg went on to compare worries over China to similar concerns about Japan in recent decades. Before China, Japan was the world's second-largest economy. From 1968 to 2010. In fact, in the mid-1980s, Japan was all we talked about. Remember the movie Black Rain, starring Michael Douglas? Or Rising Sun with Sean Connery and Wesley Snipes? We were terrified the Japanese were taking over the global economy.
Japan steered global markets. Including commodities, as they have few of their own. Then, over the following quarter century after having achieved second-largest GDP status, Japan became mired in recession. Where it's remained almost 40% of the time since.
This did not unleash a global recession. In fact, the U.S. was in a bull market with robust economic growth throughout most of Japan's economic distress.
Rosenberg noted that U.S. recessions in 1990, 2001, and 2008 had nothing to do with Japan. And he doesn't believe that recent Chinese economic turmoil will significantly impact the U.S. today.
History. Psychology. Math. Investing involves a bit of all three. Humans with no interest in these areas will never good investors make. Ditto for vacuous members of the blathering punditocracy.
The Good
PPI was flat (and low inflation is good so long as the economy is growing)... Initial jobless claims moved even lower to 275K... Job openings increased to all-time highs... Sentiment polls and volatility speculation have shot higher (both bullish contrarian points)... The budget deficit as a percentage of GDP continued to decline...
The Bad
Deaths related to automobile accidents spiked higher by 14 percent last year (Warren Buffett attributes this to drivers texting behind the wheel)... The odds of a government shutdown this fall have increased... University of Michigan Consumer Sentiment Index declined to 85.7...
The Ugly
The growing Syrian refugee crisis. The human toll is tragic. The economic consequences could be enormous...
Weekly Results
Major markets finished higher last week. The DJIA gained 2.05%, the S&P 500 rose 2.07%, and the Nasdaq added 2.96%. Small cap stocks rose 1.90%. And the 10-year Treasury bond yield gained 6 basis points to 2.19%. Gold dropped $15.67 per ounce, or 1.39%.
