The market is readying for a rate increase from the Fed. But one portfolio manager maintains it’s the Fed that should be concerned about a big move from the markets, namely a major selloff.
Despite noting modest economic growth, the Federal Reserve is widely expected to hike its fed funds rate by the end of this year. Since December 2008, the Fed has pursued what often called “zero interest rate policy” or ZIRP.
As investors wait for the Fed to move, stocks have stayed range-bound for the past several months. The S&P 500 (^GSPC) has generally stay in a 100-point range since February, one of its tightest ranges in recent memory.
However, Doug Ramsey, portfolio manager at The Leuthold Group, sees trouble ahead for stocks that will make the Fed hold off on any rate hikes this year.
“It’s not how the market will respond to the first Fed rate increases, it’s how might the Fed respond to a possible stock market correction,” Ramsey said.
The S&P 500 has gone since 2011 without falling 10% below a previous record high. As of Thursday, the index is 1.5% from its May 20 peak at 2,134.72.
“Our concern is that there are a number of pieces falling into place that indicate a cyclical market top – at a minimum, a serious correction,” warns Ramsey.
If that happens as the Fed goes into its September meeting, there won’t be a rate increase, he said, citing some monetary policymakers’ previous concerns when stocks sold off in mid-October 2014. At the time, St. Louis Fed President James Bullard publicly suggested the U.S. central bank continue its massive bond-buying program that had kept rates low.
“When the Fed says it’s data-dependent, we sometimes chuckle and say they’re DJIA [Dow Jones Industrial Average, ^DJI] dependent,” Ramsey mused. “They’re very focused on the asset markets in a way that I think is unfortunate.”
He argues that the Fed waited too long to raise rates, leading to malinvestments, particularly in the energy sector.
“There was excessive investment related to how high oil prices were able to stay for so long,” said Ramsey. “The odds are on the other end of the cycle at the bottom of the next recession, we’ll look back and say, ‘Oh, yeah, it stands to reason that 6-plus years of ZIRP caused excesses.’”
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