Why the Fed’s Rate Hike Might Be a One-Shot Deal

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Even though the past week’s economic calendar was light, the few data points released showed that despite a healthier consumer, the economic recovery remains uneven. Pending Home Sales for November were down by 0.9% versus a forecast for a rise of 0.5%. Weekly Jobless Claims for the week ending Dec. 26 were 287,000, above the consensus forecast of 270,000, and Chicago PMI for December, which measures manufacturing activity in that region, came in at 42.9 and well below the consensus forecast of 50.1.

All of this good weather hasn’t really moved the growth needle and it makes one wonder what to expect going forward and what Fed officials were thinking when they raised the Fed Funds Rate two weeks ago. Janet Yellen and her cohorts at the Fed are playing politics in order to rationalize all the stimulus created that has ballooned the Fed’s balance sheet by more than $64.5 trillion. Yet the economy is plodding along at a revised 2.1% for the third quarter. The latest inflation rate for the United States is 0.5% through the 12 months ended November 2015, and that was the highest monthly read going back to January. The Fed has a 2.0% inflation target that signals a healthy economy. Obviously, there’s work to do.

Below is a table published by the UN Economic Department that provides a snapshot of where the global economy has been and what is forecast for 2016. Most notably, the growth forecast for all but one region of the world has been revised lower, primarily as a result of the bust in the commodity markets and a widespread slowdown in manufactured exports from emerging markets.

Exclusive  Is This App Brokerage Showcasing the Future of Trading?
Growth of world output, 2013-2017

Percent Change from May 2015 Forecast
Regional Growth Rate 2013 2014 2015 2016 2017 2015 2016
World 2.3 2.6 2.4 2.9 3.2 -0.4 -0.2
Developed economies 1.0 1.7 1.9 2.2 2.3 -0.1 0.0
United States 1.5 2.4 2.4 2.6 2.8 -0.2 -0.1
Japan 1.6 -0.1 0.5 1.3 0.6 -0.5 0.2
European Union 0.2 1.4 1.9 2.0 2.2 0.0 -0.1
Economies in transition 2.2 0.8 -2.8 0.8 1.9 -0.9 -0.2
South-Eastern Europe 2.4 0.1 2.1 2.6 3.0 0.7 0.1
Commonwealth of Independent States and Georgia 2.2 0.8 -3.0 0.7 1.8 -0.9 -0.2
Russian Federation 1.3 0.6 -3.8 0.0 1.2 -0.8 -0.1
Developing economies 4.6 4.3 3.8 4.3 4.8 -0.6 -0.5
Africa 3.4 3.1 3.7 4.4 4.4 -0.3 -0.4
East Asia 6.3 6.1 5.6 5.6 5.6 -0.4 -0.4
China 7.7 7.3 6.8 6.4 6.5 -0.1 -0.4
South Asia 4.8 6.2 6.0 6.7 7.0 -0.6 -0.2
India 6.4 7.1 7.2 7.3 7.5 -0.4 -0.4
Western Asia 2.4 2.1 2.0 2.4 3.0 -1.0 -1.2
Latin America and the Caribbean 2.7 1.0 -0.5 0.7 2.7 -1.0 -1.0
Brazil 2.5 0.1 -2.8 -0.8 2.3 -1.7 -1.3
Least developed countries 5.4 5.1 4.5 5.6 5.6 -0.3 -0.1

Source: United Nations Department of Economic and Social Affairs

It is simply hard to imagine the justification for any future rate hikes against this backdrop, as such a policy will only cause the dollar to strengthen further, hurting profits for export-dependent companies. From my vantage point, the big picture for 2016 is that low oil and commodity prices will persist, the dollar will continue to strengthen against the euro, yuan and yen, the annual inflation rate will struggle to reach 1.5% and long-term bond yields will remain subdued. It would be a stretch for the Fed to consider tightening interest rates further knowing that doing so would just create more headwinds.

The growth forecast both here and abroad just doesn’t support more rate hikes. As such, the case for dividend investing and buying into debt instruments with maturities of less than 10 years is compelling for income investors as we head into the first quarter of 2016. Certainly things could change if global growth resumes at a higher rate, but at the present, the evidence is on the side of using any pullbacks in high quality income-bearing assets as buying opportunities. That’s my 2016 call on the market and I’m sticking to it. Happy New Year!

In case you missed it, I encourage you to read my e-letter column from last week giving some perspective on the junk bond credit crunch. I also invite you to comment in the space provided below my commentary.

Like This Article?
Now Get Bryan's FREE Special Report:
My Top Monthly Dividend Payer

Get paid every single month by some of the world’s biggest companies.

Get Access to the Report, 100% FREE


img
previous article

U.S. stock markets closed 2015 on a down note, with the Dow Jones down 0.72%, the S&P 500 pulling back 0.83% and NASDAQ falling 0.81%. The MCSI Emerging Markets Index also tumbled 2.45%. Among your current holdings, Signature Bank (SBNY) fell below its 50-day moving average and moved to a HOLD. Scanning the headlines this morning, you’ll see that 2016 is hardly off to a great start. Instead of the usually optimistic headlines that dominate this time of the year, the mood

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE