Another clue about interest rates... 'There is a high bar right now to not acting'... What you need to know about stocks and interest rates... What to do now... Your last chance to profit from the 'Draghi Asset Bubble'?...
We got another clue that the Federal Reserve could be ready to raise interest rates in September...
As we noted last month, several members of the Fed have recently suggested a rate increase could be coming as soon as the September policy meeting.
In particular, Janet Yellen – the current chair of the Federal Reserve Board – reiterated that the central bank was still on track to raise rates this year despite the recent troubles in China and Greece.
That same day, Boston Federal Reserve President Eric Rosengren said he believes the Fed could begin raising rates at any time, including the September meeting. "I don't rule out any of the meetings from here on out," he said at the time.
Rosengren is not a "voting member" of the Fed this year... meaning he won't be directly involved in the decision to raise rates. But as we noted in the July 14 Digest, his opinion shouldn't be discounted...
Rosengren is known as one of the Federal Reserve's most "dovish" officials. In other words, he's been one of the biggest proponents of low interest rates and "easy money" policies.
If Rosengren thinks it's finally time for higher interest rates, it's likely other Fed officials agree.
According to the latest Fed member to speak out, that appears to be the case...
In an interview with the Wall Street Journal on Tuesday, Atlanta Fed President Dennis Lockhart – a voting member of the Fed – said he thinks the economy is ready for a rate increase next month. From the article...
"I think there is a high bar right now to not acting, speaking for myself," Mr. Lockhart said...
He is among the first officials to speak publicly since the Fed's policy meeting last week, at which the central bank dropped new hints that a rate increase is coming closer into view, a point he sought to underscore.
Mr. Lockhart is watched closely in financial markets because he tends to be a centrist among Fed officials who moves with the central bank's consensus, unlike those who stake out harder positions for or against changing interest rates. His comments are among the clearest signals yet that Fed officials are seriously considering a rate increase in September.
Lockhart pointed to positive signs from the economy and jobs, and noted only a "significant deterioration in the economic picture" would change his mind...
"We're getting positive signals from the employment numbers," he said. The unemployment rate fell to 5.3% in June, well below the recent high of 10% in 2009. Job gains have averaged 208,000 a month this year, compared with 260,000 a month last year.
Moreover, he added, the economy appears to have snapped back from a growth slowdown in the first quarter. "I take the second quarter to have been a nice rebound from the first quarter and my forecast for the third quarter and the fourth quarter is that they will show some improvement over the second quarter."
Hoping to take a longer-term view of economic developments, he added that he wasn't inclined to put too much weight on new data that emerges in the next few weeks unless it is especially weak. "My priors going into the [September] meeting as of today are that the economy is ready and it is an appropriate time to make a change," he said.
What makes his comment especially notable was the market's reaction to it...
If you're not familiar, traders can buy and sell "futures" and options contracts to protect against interest rate risk and to speculate on interest rate changes. As a result, you can use the market price of these "fed-funds futures" to gauge where the market thinks interest rates are headed.
Despite the earlier comments from other Fed officials, the market put the odds of a September rate increase at just one in three for much of the summer. Following Lockhart's interview, the odds jumped to nearly 50% according to Bloomberg.
One of the biggest worries we hear is that higher interest rates will be bad for stocks.
We've discussed why the conventional wisdom on stocks and interest rates is wrong several times. Our colleague Steve Sjuggerud has studied past interest rate increases and found rising short-term rates are often bullish for stocks.
And Retirement Millionaire editor Dr. David "Doc" Eifrig agrees. As he shared with his subscribers last month...
Stocks do react negatively to rising rates in the short term. But the truth is, there's no better time to be in the stock market than when interest rates are rising...
The Fed only raises rates when we've got a healthy, vibrant economy. That overcomes any headwinds that interest rates may cause. Just take a look at the last 30 years.
Incredibly, higher short-term rates don't necessarily mean higher long-term interest rates either.
Steve Sjuggerud explained this unusual fact to DailyWealth readers earlier this year...
You see, the Fed controls short-term interest rates. But it doesn't control long-term interest rates – those are set by the financial markets.
The conventional wisdom is that if the Fed raises short-term interest rates, then long-term interest rates would follow them higher. You can see the logic... but it doesn't have to happen. For example, the last time the Federal Reserve raised short-term interest rates, long-term interest rates stayed roughly the same, between 4% and 5%. Take a look:
The Fed dramatically raised short-term interest rates – from 1% to more than 5%. Meanwhile, long-term interest rates stayed roughly the same. (Mortgage rates stayed the same for those years as well, hovering around 6%.) Could something similar happen again this time around? Absolutely.
As we've discussed, we believe we're in the "final innings" of this bull market.
We can't know how long it will continue. But as Steve has explained, the biggest gains often come at the end of a bull market.
So while we see plenty of reasons for caution, the market can continue higher. And the prospect of a Federal Reserve interest rate hike alone is no reason to sell.
We continue to recommend a "cautiously bullish" stance today...
Avoid risky assets (like high-yield bonds), focus new money on conservative opportunities (and select speculations, if appropriate for you)... but keep your "catastrophe-prevention plan" in place, just in case.
One area of the market several of our analysts are bullish on today is European stocks.
Regular readers know Steve has helped his subscribers make incredible gains over the past several years with his "Bernanke Asset Bubble" thesis.
In short, Steve predicted the Federal Reserve's unprecedented policies and super-low interest rates would cause U.S. asset prices to soar higher than almost anyone believed possible. Today, we know he was exactly right... and his readers are still profiting.
Steve also predicted Mario Draghi – the head of the European Central Bank ("ECB") – would follow the Federal Reserve's playbook to create his own version of the "Bernanke Asset Bubble" in Europe.
And while the "Draghi Asset Bubble" has faced some serious headwinds – including the recent flare-up of the Greek debt crisis – there are signs it could finally be taking off...
As we noted last week, recent data suggest the member economies of European currency union are finally starting to grow again.
Today, the CEOs of several top companies are confirming the improvement. From an article in Reuters...
Chief executives of some of the biggest U.S. and European companies told investors in recent weeks the region was experiencing a sustained recovery, helped by a turnaround in southern Europe, which had been a drag for years.
"Europe has come back to growth this year," Ivan Menezes, chief executive of drinks-maker Diageo plc told investors last week.
Not only is Europe growing again, but the article notes it's actually becoming an "outperformer" for some companies...
"It was the bright spot," said Nick Fanandakis, chief financial officer at DuPont. "It was somewhat of a surprise," he added. In volume terms, Europe had been the chemicals group's best performing region in the quarter, CEO Ellen Kullman said.
Truck-maker Scania, a unit of Volkswagen AG, said its orders rose 41 percent in the second quarter in Europe, compared to the same period last year, while U.S. rival PACCAR Inc said orders at its European unit, DAF, were 60 percent higher in the quarter, as growing freight traffic – a key economic indicator – drove sales. Strengthening customer demand allowed companies including Swedish lock-maker Assa Abloy, packaging-maker Smurfit Kappa, and dairy group Danone, to raise prices or lift margins.
Even companies that have still not returned to their pre-financial crisis health, like General Motors, whose European operations are still loss-making, said they were increasingly confident the worst was past. "For me it was very, very promising and very optimistic based on the results in the second quarter," said Chuck Stevens, the U.S. carmaker's CFO.
But perhaps the strongest comments came from executives in the staffing industry, which is noticing strong demand as companies hire more workers for the first time in years. More from the article (emphasis added)...
Dutch-headquartered staffing group Randstad said increased business activity was feeding through to hiring. CFO Robert van de Kraats told Reuters last week that current labor demand was "consistent with the early phase of a cyclical recovery."
Jonas Prising, CEO of Milwaukee-based rival Manpower, echoed other companies in highlighting "very strong performance" in southern Europe. Prising said the situation in Europe's economy – which grew at a little over half the rate of the United States last year –now was "not unlike the recovery we saw in the U.S. following the great recession."
As we discussed last week, Steve is still bullish on European stocks. He believes the rally will gain momentum as the situation improves from "bad" to "less bad"...
If you've missed the stock boom in the U.S. since 2009, you are in luck with Europe... You get another chance at it.
You see, the U.S. is further along in its recovery than Europe is. So the zero-interest-rate policy in the U.S. will be going away at some point soon. But that's not the case in Europe.
Interest rates will stay near zero in Europe for a while... and that should fuel a U.S.-style boom in European stocks and property. Also, importantly, European stocks are not nearly as expensive as U.S. stocks...
Like Steve said, if you missed out on the big gains in U.S. stocks over the past few years, we think European stocks could be a great "second chance."
But the latest news suggests the "Draghi Asset Bubble" could be taking off... and this opportunity may not be around much longer.
New 52-week highs (as of 8/4/15): SPDR S&P International Health Care Sector Fund (IRY) and short position in Viacom (VIAB).
Another slow day in the mailbag… What can we do for you? Send your questions, comments, and complaints to feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
August 5, 2015
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