If we look at the charts for the major market indices over the last few weeks, you would think we are riding a world-class rollercoaster filled with sharp moves lower, followed by ascents before an eye-opening and white-knuckling fall before recovering in the nick of time. Even a seasoned rollercoaster rider might be tempted to reach for the vomit bag. I’m exaggerating a bit, but only by a little as 2016 has been volatile and continues to be turbulent.
There are many factors that are leading to the ups, downs and all arounds in the market — fluctuating oil prices, the adoption of negative interest rates in Japan and the likelihood of more monetary stimulus in China and the euro zone. A slew of economic data is causing gross domestic product (GDP) forecasts for 2016 to be recast lower.
That last one has led many to think the Federal Reserve will not march down the path of raising interest rates near-term. In fact, there are some economists that are now thinking the Fed may not even raise interest rates for the rest of the year. Granted, 2016 is an election year. But when we look into the ISM Manufacturing Report of the last several months, we see the domestic manufacturing economy has been contracting since October. We’ve also seen an accelerated slowdown in the services economy per data from ISM. The initial GDP print for that quarter was 0.7% compared to the expectation of 2% in September. If you listen carefully, you can hear the warning bells going off.
These reports and others, like the weak January Employment Report and disappointing December Retail Sales Report, have led economists to re-think their GDP expectations for the coming months. Earlier this week, Deutsch Bank cut its 1Q 2016 GDP forecast to 0.5% from 1.5% and revised its view on 2Q 2016 GDP to 1.0% from 2.2% this week. Certainly, it is not the direction we’d like and not one that President Obama wants during his last year in office. But then again perhaps the economy would be far stronger without the incremental taxes, higher healthcare costs and mountain of regulations that are choking businesses.
Now what does all this have to do with Fed Chair Janet Yellen?
Today, it’s once again time for Yellen to share some scintillating prepared remarks on the economy and the recent Fed actions, as well as answer questions from the House Financial Services Committee. I sure don’t envy Yellen and it’s got nothing to do with answering questions from people who for the most part don’t really understand the inner workings of the economy or the financial system. If you were busy campaigning and fund raising, how could you have time to be up to speed on those ever-evolving topics?
I don’t envy Yellen, because she is in a no-win scenario. If the Fed continues to boost interest rates, it runs the risk of choking what life there is from the U.S. economy. If the Fed doesn’t increase rates, it risks spooking the market over the health of the economy. Even if it doesn’t increase rates, odds are high the U.S. dollar will continue to strengthen should the European Central Bank and the People’s Bank of China pile on the monetary stimulus as expected.
Of course, I don’t expect Yellen will make any formal monetary announcements during her two days of testimony, but I do expect the financial media and the investment community to be parsing her well-chosen words for any hints or clues as to what may happen when the Federal Open Market Committee meets next in March.
Given the slowing glide path of the domestic economy and additional monetary actions taken in recent months outside of the United States, I continue to expect the next rate hike later rather than sooner in 2016. That’s music to the ears of subscribers to my Growth & Dividend Report newsletter as they are sitting pretty so far in 2016 as we smartly exited the Growth part of our holdings in early January, but held onto the Dividend side. As investors have returned to higher-dividend-yielding equities as a port in the current market storm, my subscribers have been watching their holdings rise.
What high-dividend-yielding stock will I recommend to my subscribers next? When will I start to recommend some new Growth positions? Come join us and find out.
In case you missed it, I encourage you to read my e-letter column from last week about how investors can still profit in this challenging market.