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Experts: Too Late For Rate Hike In 2015
Aspire, Investments | 21 July 2015
By: Lim Si Jie
Articles (169) Profile

In light of the Federal Reserve holding off on raising interest rates, chief market strategist at Wells Capital Management, Jim Paulsen thinks that the Fed may have “missed its best chance” to ramp up interest rates to ‘normal levels’.

Previous rate-hiking cycles did not led to stock market crashing because they took place during periods where corporate profits were increasing. Jim Paulsen believes that at the end of the day, the stock market is fundamentally propelled by profits, something which few would beg to differ.

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Earnings Trend Still Weak

According to S&P Capital IQ, S&P 500 companies reported a 3.2 percent gain in Q1 profits despite a revenue decline of 1.7 percent Year-on-Year (YoY). Analysts are expecting a second quarter showing of 4.3 percent decline from the previous year. However, if the slowing trend continues into Q3 and Q4, there will be flat to slightly negative growth for 2015.

Furthermore, if the Fed ends its monetary easing policies, the economy will take an even harder hit. The latest earnings from Wall Street are relatively weak and it could be because of the Fed dragging the interest rate hike for the longest time.

Lack Of Liquidity

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New rules intended to bolster the safety of the financial system have prevented banks from dabbling in fixed income assets. Unfortunately, this resulted in the opposite of the intended effect and left fewer buyers and sellers in the bond market.

Citi’s Head of America Economics William Lee believes that the concerns about “lack of liquidity” in the fixed income markets would halt any Fed action in the foreseeable future, not even at the end of the year.

Rate Hikes In 2015 Unlikely

According to Lee, investors need not worry about the upcoming rate hikes as the Federal Reserve is actually afraid that any changes to interest rates would put global bond markets in chaos.

If The Fed raised interest rates, which is expected by many to be later this year, it could leave the bond market vulnerable to “very severe bumps”. In order to avoid the bumps, the Fed needs to ensure that the bond market has enough capacity to absorb the blow.

The Fed would also need to convince investors that the hike will be gradual to avoid “taper tantrum”, a sharp selloff in bonds like the one experienced during mid-2013.

Volatility Spillover Into Equities

Lee added that another factor preventing the Fed from taking action is the fear of bond market volatility spilling over into equities. With historical rates staying steadily near zero since late 2008, equities have been somewhat of a “safe haven for investors” in the longest stretch of accommodative monetary policy.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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