Stocks are finally starting to move ahead of the Fed interest rate announcement. The Fed will let us know if it is hiking the overnight lending rate on Thursday.
It’s kind of funny how worked up investors have gotten about a quarter-point hike. I mean, do we really think that will affect anything?
It’s a token move. And the next couple of hikes will be token moves, too. There’s no way the Fed is going to hike rates to the point that they can actually have some impact — say 1.5%. And I think the ceiling is lower than that, probably 1%.
Really, I don’t think the recent weakness has been Fed-related anyway, despite what the financial media keeps saying. China is what’s worrying investors. Overcapacity and a slowing Chinese economy is killing commodity prices — and that’s taking emerging markets down, too. There’s not likely a quick fix for that.
The best-case scenario is simply no bad news from China.
As far as the Fed goes, I think most people would say it’s time for a rate hike. They’ve been on the floor too long. The market is so ready for a hike, it’s not even funny. If Yellen hikes a quarter point and reiterates that this is not the start of a long-term campaign to “normalize” rates, this stock market is going to launch.
Bank of America may be the single-best rate hike trade out there. At $16 now, it could be $17.50 by Friday, and yes, I am holding some call options on it.
I was doing some digging about third-quarter earnings for my September issue of The Wealth Advisory, and it turns out that analysts are not lowering their numbers very much ahead of the quarterly reports. Of course, analysts always lower numbers as they get more “clarity” about how things are going in a quarter. But it is encouraging that third-quarter revisions are less than average. Alcoa reports on October 8.
Plus, hedge and mutual funds sold a lot of stock over the last month. That means they are loaded with cash, and they will put it to work quickly if things start moving.
Now, with all that said, I haven’t turned wildly bullish. I think there’s more to come from China and emerging markets. But the conditions right now support a decent rally.
Until next time,
Until next time,
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.