The Federal Reserve’s next move is at the top of investors’ watch list right now. While the central bank could throw an interest rate wrench into the calculations before the election, it’s highly unlikely. Wall Street sets the chances of action during the Fed’s November 1-2 meeting at below 10% simply because it hasn’t happened in an election year since 1980, and it would take a whole lot of inflation over the next week and a half to force Chair Janet Yellen’s hand.
Instead, it’s more likely the can will be kicked until the final meeting of 2016 on December 14 – a full year after the initial tightening move that wracked the market. I think the first hike hurt simply because the math was less certain after the better part of a decade with interest rates effectively at zero. After all, we didn’t exactly know what unexpected challenges a move up from zero could create for the yield curve a year ago. But investors can more readily figure out what a hike from 0.25% to 0.5% means for interest rates. And even then, we know rates are going to stay at historically-low levels for some time to come.
Right now it’s close to a coin flip whether an increase will come in December, so that represents additional uncertainty for risk-averse investors. If we have better clarity as we approach December, look for winners and losers to emerge as Wall Street gets ahead of the Fed. Banks and brokerage stocks will rise or falter. Debt-laden companies and stocks like utilities that compete with bonds will go the other direction.
But December is a long way away and we’ll be seeing a lot of economic data between now and then. By the time the quarter is winding down, I think we’ll see the markets rallying in relief over decent earnings and an election that we all realize we can survive.
An average year on Wall Street gives stock investors about 8%-11%, which is a number we actually haven’t seen in some time. “Average” would feel really good and we’re already halfway there for 2016. Earnings season has already gotten off to a relatively smooth start, so we could see a decent rally as the risks lessen.
After all, stocks aren’t at historically unsustainable valuations yet. We’ve come as far as we have on sentiment so guarded it practically passes for cynicism. A little hope would be a boost, and it could come from the economic data, corporate results or a new mood in Washington. However it plays out, it will be an interesting finish to 2016.