The Jackson Hole Meeting – Should You Care?

By David B. Armstrong, CFA | Aug 29, 2016 | Weekly Market Commentary

Much of last Friday’s speech was dedicated to the tools (actual “monetary tools”, not people) the Fed can use to stimulate the economy. The speech also included how the Fed might react to a future recession.

This remark by Janet Yellen received the most immediate attention— “I believe the case for an increase in the Fed funds rate has strengthened in recent months.” You can Google the transcript to fact check or read more.

There was nothing specific regarding the upcoming meeting scheduled for September 21st. FROM HER. But man did the press eat it up. Lots of speculation started swirling around and now there are a lot of opinions that the likelihood of a rate increase went way up.

I’m not so sure. Harry Truman had a famous wisecrack about economists where he said, “Give me a one-handed economist! All my economists say, ‘on one hand … on the other.’”

On one hand, Yellen’s comment keeps the door cracked open for a September rate increase in the event of a very strong August jobs report. It also keeps a December rate increase on the table…and it doesn’t REALLLLLY rattle markets.

But then her number two, Vice Chair Stanley Fischer, said in a CNBC interview later in the day that her comment was consistent with a September rate increase and up to two hikes this year! He emphasized the upcoming data, including this Friday’s upcoming payroll number for August, will play into the decision.

Investors took note of his comment, sending Treasury yields slightly higher (because people sold treasuries) and stock prices modestly lower by the close.

*Shaded areas mark recessions.

So I return to my blog title, “Should you care?”

Well, if you are a saver and you want to make more money on your deposits, then you should want to see higher interest rates. And if you take a look at Charles Sherry’s chart above, you can see that it’s not only been a long time since we have had any meaningful interest on deposits…it’s SUPER LOW. In fact, you can barely see the blip of last year’s rate increase.

However, most people are not trying to grow their wealth by plopping dough into a savings account. People who have a good, solid financial plan and a disciplined investment strategy are longer-term stock market investors. (Like YOU, right?)
Investors know (and accept) that rate increases can create short-term volatility.

Investors ALSO know that the biggest factor in stock prices has historically been corporate profits and expectations of corporate profits…otherwise known as earnings.

…and a strong economy has historically been a tailwind for earnings growth.

…and rates only get increased when the economy is growing.

…and guess what currently has tepid growth, at best?

Yup – the economy.

I’ve written over and over that while the economy is far from being on fire, it is still growing and in positive territory.

My opinion is that this is all a bunch of hot air and at the end of the day there will be no rate hike in September. She has spoken like this before and rate hikes have never come. Plus, I don’t think I’d refer to the last rate hike as a success. (You remember the markets in January and February, right?). No candidate wants a shit storm going into November when there is no real pressing need to hike right now.

I’ll end with this paragraph from a Trend Macro blog I saved back in May of 2016 about the beginning of 2016:

“Mere weeks after Yellen confessed ‘uncertainty’ after a disastrous liftoff, suddenly Fed officials see “at least” two rate hikes in 2016, perhaps starting in June – and the April FOMC minutes can be read the same way. We don’t believe it will happen. We still think no hike until December, and probably not even then. There’s no good reason for it, and lots of good reasons against it. And once burned, twice shy. But if we’re wrong, then the Fed will have revealed itself to be stuck on stupid, and markets will unravel very fast and very hard.”

While this week should (conceptually) be slow with most people trying to scoot out of work early on Friday, it’s not a light week for economic reporting. There are 34 data points being released next week.

I’ll be watching the ISM Manufacturing, vehicle sales and employment reports.

Finally, a follow up from a paragraph from my last blog subtitled “Zero Value Added” which can be found if you scroll about one-third down the page. I got a ton of response on that and thank you to “JM” for your complementary words and encouragement to start a “Jon Stewart type show about finance.” My response? Maybe. BUT as a follow up to this chart…

I’m still a little speechless about the usefulness of this type of information. I guess there are people out there who manage money for people based on this type of narrowness…but we don’t. And we won’t.

I have a lot of fun writing my blog and I take pleasure and pride in its lightheartedness. I’ve never been one to take myself too seriously but that should NEVER be mistaken for not taking our business and our clients’ money seriously.

We are deadly serious about it. Everyday.

Acting on “analysis” like the above is like trying to pick a turd up by its clean end – you still end up with crap on your hand. We don’t play guessing games with other people’s money. It’s an attempt to manipulate your behavioral biases. Don’t let charts and research like this endanger your journey to building wealth over time in accordance with your long term plan.

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