Morning Report Monday 5 January 2015
American Equities usually corrects ahead of Interest Rate Rises
The US Fed is already warning the markets about future market volatility, as it prepares to raise short term interest rates. As the 214% rally since 2009 demonstrates, you don’t fight the Fed! We have experienced unprecedented Monetary Stimulus (Quantitative Easing / QE) as the Central Bank successfully lifted the US economy out of recession into a relatively healthy state.
The statistics are very powerful around this part of the US economic cycle:
• In almost 90% of occasions, the S&P fell within 6 months of the US Fed’s first increase in interest rates, often over 15%.
I want to yet again point out I am only looking for a 15% correction in US stocks, which is hardly a dent compared to recent advances, and only back to recent October lows - see chart 1. Prior to the $A falling from the mid 90c region to currently testing 80c, I believed the RBA would actually be considering cutting interest rates in Australia, however now am leaning to another 12 months at current levels. As interest rates are set to rally in the US (the rest of the world is clearly behind in terms of improvement), successful investments of the last 5 years can easily become the laggards of the next 5 years.
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