Strong October Reports Could Signal FOMC Rate Hike

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.
Federal Reserve Building

I woke up this morning to news that the U.S. economy added 271,000 jobs in October, and that the unemployment rate had fallen to 5%. Maybe even more important than those positive headline numbers was the average hourly earnings metric, which rose to 2.4% during the month.

I say that with some uncertainty, because this last measure of the employment picture is something that has lagged significantly for some time. As a measure of wage inflation,  this metric is also something the Federal Reserve has been watching for some time, as it relates to overall inflation.

The combination of a strong jobs report, a lower unemployment rate and rising wages is something that I think not even the “dovish” Fed Chair Janet Yellen can ignore. As such, I suspect we will see a 25-basis-point increase in the Federal Funds rate when the Federal Open Market Committee (FOMC) meets in December.

Now to some market observers, this is going to be a negative for equities. I don’t agree with that observation. I think that the Fed finally hiking rates, after being at near-zero for so many years, is going to be the first real sign that the U.S. economy is in strong enough shape to handle the very slight increase in the cost of capital. I also think that, over the long term (throughout 2016), the move by the Fed will be a positive one for the stock market.

Will there be an immediate sell-off in stocks when the Fed finally does raise rates? Probably, but that is a dip that I would be inclined to buy into, as it likely would be just some fast-money traders nabbing profits.

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As for the markets, the long-term trend now for domestic stocks is a confirmed bull. The chart below of the S&P 500 Index clearly shows that the broad measure of the U.S. equity market trades well above both its 50- and 200-day moving averages.

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The outstanding run higher in stocks in October was the catalyst for the move back above the key 200-day trend line. The breaching of this key moving average also helped give the Fabian Domestic Plan, the backbone of my Successful ETF Investing newsletter service, a new equity buy signal.

As for bonds, the much-better-than-expected jobs report has increased the chances of a rate hike in December substantially, and that has had a marked effect on both Treasury bond and the dollar. Treasury bonds slumped on the news (yields spiked) as higher rates are bond bearish.

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Conversely, higher rates are bullish for the U.S. dollar vs. rival foreign currencies, and we saw that reflected in the 1.2% jump in the PowerShares US Dollar Bullish ETF (UUP).

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If the dollar continues to get stronger on the growing likelihood of a Fed rate hike in December, then you can be sure this will have major implications for emerging market stocks, European stocks and Asian stocks.

Over the next six weeks or so, we’ll be keeping a very close watch on bonds and the dollar for any clues as to what could take place in global equity markets and, of course, what it means for investors going forward — so be sure not to miss a single issue of the Weekly ETF Report.

An ETF for the Next Cyber Attack

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Cybersecurity is a serious problem.

From the U.S. Office of Personnel Management, to M.I.T., to American Airlines and Ashley Madison — the cyber hits just keep rolling along, and doing serious damage to the U.S. economy.

Over the past several years, the volume of high-profile attacks has sparked a massive demand for cyber defense.

What that means for you is the opportunity to profit from one of the most innovative ETFs to come to market over the past few years, the PureFunds ISE Cyber Security ETF (HACK).

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I really believe in this fund, which is why I recently hosted a free online webinar featuring a panel of cybersecurity and investment experts from PureFunds.

Now, I am happy to tell you that a replay of that free webinar is available for viewing right now.

If you want to understand the cybersecurity boom and how to properly invest in this burgeoning area, this free webinar is a must.

I guarantee you’ll feel more secure knowing that some great companies are out there waging the cyber war against hackers, identity thieves and other nefarious sorts.

On Lying

“The most common lie is that which one lies to himself; lying to others is relatively an exception.”

–Friedrich Nietzsche

We are in the midst of presidential primary season, and that means the lies, half truths and hyperbole are coming from every corner of the political spectrum. As voters and conscientious citizens, we have an obligation to seek the truth from the candidates, as truth really does matter when it comes to selecting the right person for the most powerful office in the land. Here’s to hoping that truth prevails, wherever that truth may lead.

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Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about the most important questions to answer ahead of buying an ETF. I also invite you to comment in the space provided below.

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