If you grew up in the 1970s or 80s, you probably watched “Battle of the Network Stars”. For those of you too young to remember Howard Cosell and Telly Savalas, “Battle of the Network Stars” was a very successful limited run TV show that featured celebrities competing in athletic events. Nowadays it seems as though we are going through the “Battle of the Network Market Commentators Clichés” about the Fed’s potential next move.
It doesn’t matter if its TV or the financial press you can’t escape various Fed prognostications such as: The Fed will raise rates soon because unemployment data is reaching its threshold and might surpass it soon—remember what happened when the Fed tightened too early in 1937, or the Fed won’t raise rates because it is worried about the dollar and what is happening in Europe or China, and so on and so on. It gets to the point where I have heard the same arguments pro or con so many times, they do become clichés.
But still, interest rate moves deserve consideration. When it comes to the Fed and interest rate changes, I have two basic questions for myself at this particular moment in time:
1. Q) Do I think that the Fed will raise rates during my investment horizon (i.e. next 18 months)?
2. Q) Do I care?
Why? Rates can only do one of two things at this point in time, stay the same or go up. Eventually they will go up. A healthy percentage of market participants like me believe that. However, that forecast is already in my investment thesis and forecasts for the market. What is vastly more important to me is if interest rates are going to go up materially faster than I predict and will it happen during my investment horizon. There is nothing in the data that leads me to believe that it will. For example inflation is relatively tame, wages are stagnant at best, money velocity is nothing to write home about, and retail demand is just OK. Unless I was convinced that any of those things in combination above were to evolve into something more malignant during my investment horizon, there is no reason to drastically modify my investment thesis for the market.
What I try do to do in these scenarios is try to develop a list of potential market-moving events, like some of the things mentioned above like wage inflation, and monitor them for moves that go beyond my expectations. If enough of those things on my list change where my investment thesis is in danger of breaking regarding the Fed and interest rates, then I act. Until then, I don’t.
Therefore my suggestion is ignore the clichés about rates in the short term and pay more attention to matters that can cause events to materially change your investment thesis.
Oh yeah, one more thing. “Don’t fight the Fed”.