Stage 3 Investor Angst: Rate Rage
We have now entered the third stage of the psychological condition known as “Investor Angst”. As a reminder, stage one began nearly two years ago, with the "Taper Tantrum". On May 22, 2013, the Federal Reserve announced that it would begin tapering its bond and mortgage backed securities program. The news freaked out investors and they sold just about everything that was considered risky. The second stage was "Patience Panic", which began this year, as investors perseverated over whether or not the Fed would remove the word “patient” from its monetary policy statement. When the news finally emerged that the central bankers were no longer "patient" as to when they would consider hiking rates, reality sank in and investors entered stage three of the affliction, "Rate Rage".
The more rational among us might think, “Wait, isn’t it a good thing that the Fed is finally going to normalize its policy? Doesn’t that mean that the economy is officially out of the woods and we can put the financial crisis, the Great Recession and the stinky recovery behind us? And after all, who cares whether the Fed starts increasing interest rates at the June or the September meeting—does ninety days really matter to my long term game plan?”
All of those are great questions, but they matter little to institutional investors, who have been enjoying this period of ZIRP (Zero Interest Rate Policy) and are riding high on the big gains in their portfolios. The “pros” are among the most likely to suffer from Rate Rage, because once interest rates start to rise, the period of easy money is over and they must return to the mundane world where old school financial analysis is necessary to score big investment returns.
That’s why as you were gearing up for a big weekend of NCAA basketball, the “Rate Ragers” were focused on a speech that Fed Chair Janet Yellen delivered on Friday. Here’s what you need to know about the 18-page (more than 4,000 words) treatise that she delivered: the central bank will raise short term interest rates later this year; and once it does actually happen, the pace of increases will be gradual and will depend on economic conditions. In other words, Yellen told us what we already knew.
For those suffering from Rate Rage, perhaps the only solace is to remember that the rationale behind rising rates is that things are getting better. And because the process is likely to be a slow one, the U.S. economy should still be able to expand to its historic, post World War II pace of 3 to 3.5 percent. That doesn’t mean that stock prices will shoot up, but frankly, after a six-year bull market, what did you expect?
As companies’ increase wages (a good thing!), their profits will be curtailed. I’m guessing that most workers would gladly trade a bump in pay for an extra couple of percentage points of gains in their retirement accounts this year. To put into perspective how much ground needs to be covered in wages, the analysts at Capital Economics note that labor’s share of corporate profits after tax has fallen to 57.7 percent, down dramatically from the peak of 66.3 percent in Q1 2001. While the drop partly reflects “the structural forces of globalization and technological progress…it has also been a cyclical response to the deepest recession in recent memory.”
To determine when those much-needed and anticipated pay raises are coming, the focus will be on the government’s monthly employment report, which is due on Friday. It’s expected that the economy added 250,000 new jobs and the unemployment rate remained at 5.5 percent.
MARKETS:
- DJIA: 17,712, down 2.3% on week, down 0.6% YTD
- S&P 500: 2061, down 2.2% on week, up 0.1% YTD
- NASDAQ: 4891 down 2.7% on week, up 3.3% YTD
- Russell 2000: 1232, down 2% on week, up 3% YTD
- 10-Year Treasury yield: 1.96%
- May Crude Oil: $48.87, up 5% on week
- May Gold: $1200.70, up 1.3% on week
- AAA Nat'l avg for gallon of regular Gas: $2.43 (from $2.42 week ago, $3.54 a year ago)
THE WEEK AHEAD:
Mon 3/30
8:30 Personal Income and Spending
10:00 Pending Home Sales
10:30 Dallas Fed Survey
Tues 3/31:
9:00 Case- Schiller Home Price Indexes
9:45 Chicago PMI
10:00 Consumer Confidence
Weds 4/1:
Motor Vehicle Sales
8:15 ADP Private Jobs Report
9:45 PMI Manufacturing
10:00 ISM Manufacturing
10:00 Construction Spending
Thurs 4/2:
8:30 International Trade
10:00 Factory Orders
Fri 4/3: Good Friday: Markets Closed, Banks Open
8:30 March Employment Report