Key Word from Fed Watchers “Patient”

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It seems that the roller-coaster ride isn’t over yet! I am scratching my head over the fact that traders are talking about wording from next week’s Fed meeting. Apparently, removing the word “patient” from the Fed minutes means that a June rate hike is back on the table.

Raising interest rates should be seen as good news. It means that the U.S. economy is getting stronger. Last Friday’s job numbers and the lower unemployment rate were better than expected yet the good news caused a massive market sell-off. Yesterday’s market rally was based on bad news. Retail sales numbers for February came in weaker than expected.

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Fed chair Janet Yellen is stuck between a rock and a hard place. Low oil prices and a stronger U.S. dollar is deflationary. Plus the savings from lower gasoline prices haven’t shown up in retail sales yet. It could be the cold weather that is keeping consumers at home or may be they are paying down debt. The February job numbers show economic strength but wage increases are still weak.

The chart below is the year to date price movements of the Toronto index fund (XIC) and the S&P 500 index fund (SPY)

 

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For what it is worth, I think that the so called ” smart money” on Wall Street is dumb! The stock market sold off in October because traders were convinced that the end of Q.E. would lead to higher interest rates.  What they missed was foreign money was coming in to buy U.S. bonds replacing what the Fed was buying due to lower bond yields elsewhere.

The main reason for raising stock prices in February were the dovish comments from the Fed. Going forward, Q.E. in Japan and Europe is driving bond yields even lower. The current yield on a German 10 year bond is .25% so even if the Fed raises rates in June, foreign money will come in driving U.S. rates lower.

It appears to me that Wall Street is looking for an excuse to take some profits.  Removing the word “patient “from next week’s Fed meeting may be  the key to influencing stock prices. Panic selling will only increase Wall Street’s trading commissions. If you have some cash on the sidelines, get ready for a possible market correction, it could be a good buying opportunity.

I found this rather amusing from SandyNomics  blog post;

Mistakes that an Investor keep on repeating

Starting with Nassim Taleb’s sardonic story about forecasting. As the tale goes, a trader listened to the firm’s chief economist provide a forecast about the markets and then lost bundle acting on it, getting him fired. The trader angrily asked his boss why he was fired rather than the economist, as the economist’s poor forecast led to the poor trade. The boss replied, “You idiot, I’m not firing you for losing money. I’m firing you for listening to the economist.”

 Disclaimer: I do have a degree in economics but I never had a job as an economist!

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