Why Isn’t the Fed Raising Rates Now ?

Investor’s first read – Daily edge before the open
S&P 500:2,055
Nasdaq Comp.:4,846
Russell 2000: 1,109
Wednesday: March 30, 2016 8:54 a.m.
Fed Chief Janet Yellen made it official – the Fed has totally backed away from its December forecast of four interest rate hikes in 2016 and opted for a policy of “gradualism” tied to developments in economies and markets here and abroad, inflation, the dollar, and housing.
If the Street was wary of a rise in interest rates at the April meeting as speculated recently by Fed’s Bullard, Harker and Lockhart, Yellen eased their fears.
I would prefer a rise in rates if it indicated a robust economic expansion was under way. That would suggest corporate earnings would drop less than projected.
Today, Fed’s Charles Evans speaks at 1:00 p.m. and again at 9:30 Thursday. Friday, Loretta Mester speaks (1:00 p.m.).
The ADP Employment report showed a gain of 200,000 jobs. The Employment Situation comes report Friday 8:30 a.m.. However four manufacturing reports hit this week. This group is trying to rise out of a slump, so any uptick will be a positive.
The Dallas Fed Manufacturing report Monday 10:30 came in a bit better than expected; the Chicago PMI hits on Thursday at 9:45; and PMI and ISM Manufacturing reports come at 9:45 and 10:00 respectively Friday.
EARNINGS (Nothing new – re-read anyhow – important)
In two weeks Q1 earnings will begin to flow and are projected to be down, as are Q2 earnings. It doesn’t get more fundamental than earnings, yet other issues have dominated the attention of the Street so far this year.
April could be the “decider” on whether 2016 is a bear market year, or just a volatile one with big swings up and down as we near the November election.
S&P Capital IQ is projecting S&P 500’s earnings in Q1 to drop 7.0% and Q2 to drop 2.1%.* Earnings are projected to rise only 1.5%, down from a projection of plus 7.4% as recently as January.
Hopefully, a weak dollar will enable companies to post better numbers than currently projected, but that will take time. They will have to in order to justify the current level of stocks.
(I will repeat this regularly to keep readers aware of the potential for an April correction)
The market is tracking a pattern for presidential election years where an administration is in its second term.* The news is bad.
Historically, these markets have declined in Jan./Feb., rallied in March then topped out in early April, plunged in May with brief rallies in June and August and a plunge into October prior to the election.
This supports my December forecast of an ugly January, a rough year as a whole, but with several buying opportunities.
While it would be easy to go get caught up in the Street’s relief and euphoria over news the Fed won’t raise rates (after fears it would), one must ASK WHY ?
As noted, in December, the Fed was ready to raise rates four times in 2016, then only two a couple weeks ago, and now not at all.
While she referred to “external risks” here and abroad, as a reason for her decision. If these risks are severe enough to influence Fed policy, the severity of those risks should be spelled out in detail, so investors don’t take what is a negative as a bright green light to increase their exposure to those risks.
While triggered by Fed Chief Yellen’s comments, yesterday’s rise in prices after a three-day correction, kicks off the early April strength, which I believe will set the stage for a peak in April. This is the volatility I have expected.
The market jumped sharply yesterday after Yellen’s comments, and will open strong today.
Of all its successful efforts to generate buying in stocks and bonds, this one carries high risk. The bull market is long in the tooth and near all-time highs. This isn’t February 2009 when the DJIA was down more than 50% and no one would buy stocks. The downside risk here is a lot greater than the upside potential.

SUPPORT “today”: DJIA:17,563; S&P 500:2,047; Nasdaq Comp.:4,828.
RESISTANCE “today”: DJIA:17,749; S&P 500:2,069; Nasdaq Comp.:4,878.
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of March 11, 2016, a reasonable risk is 17,073 a more extreme risk is 16,970. Near-term upside potential is 17,586
 STATUS OF MARKET: Neutral – but vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 25% – 45%. Consider 75% now
 KEY FACTORS: Outlook for Q1, and 2016 earnings questionable.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
**Stock Trader’s Almanac

George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.