Could the market have a hiccup if the Fed raises rates in September? Absolutely! The stock market has been basing for several years now as we have been in an earnings recession but that is about to change and so will the market leadership.
Let me state a simple truth. The market is NOT selling off of a 1.6% 10-year bond yield. If so, the market multiple would be well north of 20 when its closer to 17 now. As Lee Cooperman said a week ago, he is using a 3.5% 10-year bond yield to come to his market multiple of 17 times. We are using a 2.5% 10-year bond yield, a 19 market multiple, $125 in 2017 S&P earnings and 10% upside for the market. So if the Fed hikes a quarter of a point all the way to 0.75%, I don't expect much impact to the economy, currencies and foreign markets after an initial downward reaction.
Can you imagine that we are worried about a 0.75% funds rate? A hike won't be due to an overheating economy or fear of inflation but an attempt to return to normalization. Is that a bad thing to do? Isn't it about time that someone declared victory after 8 years of recovering and healing from an economic disaster here and abroad?
Think about all the positives that have come out of the 2008 debacle. Banks have significantly built their capital ratios; corporations and consumers have improved their balance sheets and interest coverage ratios; more people are working and wages are rising, albeit slowly: energy prices are beneath $50 per barrel and are capped on the upside as U.S shut in production would come back on line if oil breached $60 per barrel; other commodity costs are down including foodstuffs, inflation disruptors are everywhere and globalization is a fact of life reducing inflationary expectations; and finally CHANGE is everywhere. And with change comes opportunities to profit.
I believe that the Fed should hold off until after election before returning toward a path of normalization. If they choose to hike now, it won't be the end of the world and will create opportunities to add to positions at better prices. Can you imagine the buildup in bearishness creating a classic trading bottom? While I never like to see violent moves in either direction, always maintaining excess liquidity and having internal hedges prepare us. For instance, if and when the Fed hikes, consumer nondurables, drugs, utilities and MLPs may decline while banks financials and industrials may rise.
So remember to review all the facts; step back, pause and reflect; consider mindset shifts; maintain excess liquidity and control risk at all times; do independent research on each investment idea and ... Invest Accordingly!
William A. Ehrman is managing partner at Paix et Prosperite LLC.