This week we are going to hear from the Federal Reserve with regard to monetary policy, and the general consensus on Wall Street is that the Federal Reserve is going to raise the federal funds rate-whether or not they actually should.
The fact of the matter is actually very simple. The US economy is not nearly as strong as the mainstream financial experts want you to believe, (nor is the global economy for that matter), but this is the narrative which must be maintained to keep confidence in the system high.
Here in America we have both a labor force participation rate near historic lows, and money velocity near historic lows. Without these two parameters moving higher a booming economy will remain elusive.
What we do have are multiple bubbles and malinvestments which have created financial distortions across the spectrum of asset classes, a situation which has been created by the Federal Reserve artificially suppressing interest rates for the better part of a decade. Still, I believe that the Federal Reserve has no choice but to raise rates.
Frankly, I do not care what the Federal Reserve does, I just want us all to profit from it. (Roar!)
When the Federal Reserve makes their announcement on June 14th with regard to raising rates, I expect little to no effect in the immediate term with regard to the overall stock market because I believe a rate hike is already priced in. On the other hand, in the off chance that the Federal Reserve does not raise rates I believe this would be a negative for equities.
It is a no-brainer that financial stocks "should" benefit from higher interest-rate's however, the effect on the yield curve must also be considered. It is certainly no secret that the yield curve is flattening, and in order for banks to profit a flattening yield curve is not what you want to see.
When the Federal Reserve raises the Federal funds rate, it affects the short end of the curve more so than the long end, therefore flattening the yield curve even further which is a concern longer term.
Just this past Friday, yesterday, after the NASDAQ hit an all-time record high we experienced a hard rapid selloff across at the tech sector, it is very important for us all to keep an eye on this.
One of two things is likely to happen which will bring opportunity for us in the coming week.
Number one: We will continue to see pressure build on the tech sector which has the potential to bleed off to other market sectors (creating opportunities to go short the market) or.,
Number two: When The Federal Reserve announces a rate hike the tech sector will rebound because in the short run cash may actually leave the financial sector (as a rate hike is already priced in) and simply seek another place to go.
Happy Trading my Lions!
Gregory Mannarino
