As the Fed has continued to roll back (“taper”) its bond purchase program, which will end in October 2014, the question remains: when will the central bank hike rates and what will the impact of monetary tightening be on the broader markets? This uncertainty has contributed to some of the recent market volatility. Andy Laperriere of Cornerstone Macro suggests that as “the labor market has improved much more than the Fed expected and because inflation is already at about 2%, recent Fed communication has been very consistent with a liftoff in rates in about June 2015.”i Yellen stated in her recent testimony that “the hurdle for raising rates sooner than many investors expect is simply a continuation of recent labor market progress.”ii Economist Ed Yardeni points out that Yellen reiterated previously that “with [our] productivity growth and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between--perhaps 3 and 4 percent wage inflation would be normal.”iii Wage inflation has been one of the principal concerns of central bankers since the financial crisis.
Just recently, Jens Ulbrich, the chief economist of the Bundesbank backed their support for “higher German union wages.”iv Their support of a 3% increase in pay, above their 2% inflation target, highlights the “concerns over the state of Eurozone inflation” and a “shift in stance from a central bank famed for its tough approach to keep prices in check.”v In short, central banks are closely monitoring wage growth. As Anatole Kaletsky of Gavekal recently wrote, “The main objective of monetary policy is no longer simply to control inflation; it is to accelerate nominal GDP growth, while trying to keep inflation within reasonable bounds.”vi In fact, he goes even further to add that “monetary policy will deliberately and consciously fall ‘behind the curve’ of rising inflation” to ensure that deflation does not rear its ugly head again.vii Of course, there is a parallel to the early 1980s, although the fight back then was against inflation. Paul Volcker was “behind the curve” when he raised rates so dramatically until mid-1982 despite inflation peaking in mid-1980. To try to avoid the fate of structurally low GDP and the pernicious deflation of 2009-2010, “today’s central bankers are following the same course as Volcker, but in the opposite direction.” viii
According to Cornerstone Macro, “markets tend to react well in advance of the first rate hike.”ix The adjustments in the equity markets are relatively short-lived and on average have declined “5.6% over a period of 15 weeks.” As much of the uncertainty subsides, markets typically resume their ascension as earnings growth strengthens with a stronger economy. Even in circumstances when monetary tightening is unexpected (like in 1994), the market adjusted by 7.5% downward for a period of 21 weeks.x For this reason, the volatility does not change the outlook of a secular bull market in equities. Market strategist Dave Rosenberg adds that “the history books show that at no time did a bull market end after the first rate hike. Typically — in terms of trough to peak moves in the S&P 500 — we are only one-third of the way into the bull run on the eve of the first Fed tightening in rates.”xi Nevertheless, the financial crisis of 2008 remains on the minds of many nervous investors. Richard Bernstein reminds us that “investors never fully embraced the bull market and remain very uncertain” despite the fact that this bull market is over five years old.xii While I expect to see some additional volatility in our markets and perhaps more pullback, I look at the long-term trends of the current bull market in equities and look to take advantage of every opportunity. As the famed industrialist J. Paul Getty once said, “Bank on the trends and don't worry about the tremors.”
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.
Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau focuses on equity portfolio management strategies. As a result of her extensive knowledge and expertise in the equity markets, she was named the Equity Market Strategist for HighTower. In addition to this role, she performs due diligence on the firm's third party research relationships and continues to add, monitor, and prune research providers where necessary. Prior to joining HighTower she worked for various sell-side firms beginning her tenure at Wertheim & Co./Schroders Plc.
Ms. Rosenau was ranked #15 in Barron's 2014 Top 100 Women Financial Advisors. She was also chosen for Barron's 2014 Top 1,200 Advisors list, ranking #52 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.
iAndy Laperriere. Cornerstone Macro. Policy Research. July 24, 2014.
iiIbid.
iiiEd Yardeni. Yardeni Research. July 24, 2014.
ivClaire Jones. Financial Times. Bundesbank shifts stance and backs unions’ push for big pay rises. July 21, 2014.
vIbid.
viAnatole Kaletsky. Gavekal Dragonomics. Monetary Policy Is No Threat To Markets. August 1, 2014.
viiIbid.
viiiIbid.
ixAndy Laperriere. Cornerstone Macro. Policy Research. July 24, 2014.
xIbid.
xiDavid Rosenberg. Gluskinsheff. Breakfast with Dave. July 23, 2014.
xiiRichard Bernstein. Business Insider. July 17, 2014.
