The Fed and the Markets

You've heard that old saying: "Damned if they do and damned if they don't." That perfectly fits the Fed's situation when it comes to raising rates early in December. There are plenty of arguments to bolster both sides of the decision. And no matter what the Fed decides at its December 16th meeting, the stock market is starting its most bullish long term seasonal trend.

Raise Rates, or Not?

The traditional, and most visible, signals that the Fed has always used as a guideline are mixed. Unemployment is down -- but the labor force has shrunk and wage gains are meager. Consumers have confidence, but spending on everything from cars to retail sales is mixed. (Macy's disappoints, but Wal-Mart beats estimates.) Inflation remains low and economic growth is muted, with many estimates of only two percent for the fourth quarter. So why raise rates now?

There's a queasy sense of "let's just get it over with" -- since everyone knows a small rate hike is coming. Further delay only increases uncertainty and volatility in the financial markets -- and creates imbalances in the economy. And if the Fed does delay, there will be a sense of worry over what weakness the Fed sees in the numbers to cause them to postpone again.

On the other hand, (and economists are always "two-handed"), there's significant worry that raising rates now could stall an already weak economy. Higher interest rates are certain to make the dollar more of a magnet -- and a strong dollar is bad for our exports, further weakening our manufacturing sector. Also, slow global growth and commodity price deflation signal that inflation here will remain muted, with no need to raise interest rates.

And finally, there's the question of how successful the Fed will be in the process of not only raising rates -- but making them stick. Several central banks have tried to return rates to "normal" -- and have been forced to retreat. The Eurozone, China and Australia tried to raise rates in recent years, and were subsequently forced to cut them again because of declining growth.

Stocks Enter Bullish Season

Despite concerns that a rate increase could syphon money from the stock market, and despite the fears of global terrorism, the U.S. stock market has shown surprising resilience. The Dow Jones Industrial Average is now within a few percentage points of its all-time high of 18,351.

Could it have something to do with most historically reliable market truism: "Sell in May, Buy in November"? Jim Stack of InvesTech Research reminds his subscribers that we are entering the most bullish period for stock market investors.

Full credit also goes to Yale Hirsch's Stock Trader's Almanac (here), which first uncovered this seasonal trend.

Stack compares two investors, each with a starting investment of $10,000 back in 1960, and using a S&P 500 stock market index fund (with dividends reinvested).

Investor "A" owned stocks only during the period from November 1, through April 30th each year, while investor "B" owned stocks only in the period from May 1 through October 31st each year.

Today, the portfolio of investor A would be worth $640,262. The portfolio of investor B would be worth only $29,272!

That's an astounding difference: Over that 55 year period, investor A has a 63-fold increase in portfolio value, while investor B barely triples the initial value.

Of course, there are no guarantees in the stock market. This is not a "one-year" predictive tool. It is a long-term trend that should give you pause before panicking over headline news events and even Fed actions. And that's The Savage Truth.