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This week’s Federal Reserve policy meeting was yet another nonevent as expected. In fact, recent economic data has taken a definite turn for the worse including:
A surprisingly weak September jobs report, including downward revisions to job growth in previous months …
Dismal manufacturing data that has spread to every region of the U.S. …
And this week’s shockingly bad report on new home sales, which plunged 15% month-over-month to the lowest level in almost a year.
The downbeat economic data is pushing the likelihood of a Fed interest rate increase further and further into the future. In fact, if you take a closer look at the market’s own assessment about the likely path for the Fed funds rate, you’ll see that nobody expects the Fed to raise rates anytime soon.
Just take a look at the chart below and you’ll see what I mean.
The probability of the Fed hiking rates in October plunged from a 45% chance just four months ago, to just a 4% chance as the Fed met this week!
And the odds of a rate increase by March 2016 are barely more than 50/50 at this point, down from a nearly 90% chance just four months ago.
That’s because, as I mentioned at the outset, recent economic data has taken a decisive turn for the worse, which tells me the recent stock market rally is simply not sustainable.
While the Fed is supposed to base its policy decisions on a balanced assessment of the economic data, especially jobs and inflation, you can bet that Yellen and company are nervously watching corporate sales and profit results too.
Recently in Money and Markets (see: Can Stocks Survive the Earnings Recession of 2015?) I wrote about dismal prospects for third-quarter earnings. In fact, nearly half of S&P 500 companies have reported results so far and profits are on track to decline about 3% year-over-year.
As usual, most companies are beating lowered expectations, but not by enough to make year-over-year earnings growth positive:
While 77% of companies have reported profits above estimates, only 43% have reported top-line sales above expectations. The biggest culprit being cited by many companies to explain away the sales shortfall is the strong dollar, which is a major drag on overseas sales and profits.
And that’s another good reason why the Fed is so reluctant to begin raising interest rates. Central banks globally have cut interest rates more than 500 times since 2008.
With the entire world easing monetary policy now, a Fed rate hike would send the dollar on another parabolic move higher, crushing corporate sales and profits even more.
The U.S. economy is in a precarious situation right now. Deflationary forces have reduced global growth, cutting into U.S. industrial exports, which in turn is hurting profits.
U.S. industry is contracting at an alarming rate, as you can see in the graph above, where ALL five of the Fed’s regional manufacturing surveys for September AND October came in below zero — meaning widespread contraction in factory orders and current production.
U.S. manufacturing hasn’t been this anemic since the last recession in 2009. In fact, it’s even worse now than during the global growth scare in 2011. And in 2011, the S&P 500 declined nearly 20% in just a few months!
If corporate profits end up falling again this quarter, as they are now on track to, it will be the second consecutive quarter of slumping profits for corporate America. In other words: a “profit recession.”
And that hasn’t happened since 2009, when the Great Recession was just ending.
The fact is the Fed has never before hiked interest rates during a profit recession, which is another reason why the chances of a Fed rate hike should keep falling for the foreseeable future.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 4 comments }
we’re in a correction. i’ve never met a correction (or recession) that wasn’t a buying opportunity.
Using honest inflation numbers would show the country has been in a continuing recession.That’s why Americans are complaining about their situations.Their incomes are rising slower than prices.Amazing that govt is giving no increase in SS next year.That’s going to lower the standard of living for many retirees.
Hi Mike
During the last financial collapse the causes came mostly from investments in housing and financial products. There are many threats facing us now including corporate debt. Specifically there are many commodities companies (some of my favourites) that are already suffering from price collapses. Part of their solution has been to over produce and flood the market. The danger for many with high debt loads is a regime of increasing interest rates. This would precipitate a final collapse where they have products in which they can’t make a profit and then they are swamped by unrepayable debt.
Hello Mike,
Thanks for another well written, interesting, and informative article; I agree completely.
Additional reasons I see are:
The FED holds trillions of dollars of treasuries; if rates rise, their holding fall in value – a capital loss. Remember, the FED is a private bank (Owned by whom? We don’t know) – bankers do not like loses.
Higher rates increase the government’s cost of debt service leading to tax increases (not likely), cuts in other spending (less likely), more borrowing (most likely). But, who will buy the new debt – the FED? That would make their potential capital loss worse if rates continue to rise.
States, local governments, individuals, and many businesses are also deep in debt and a rise in rates will likewise increase their debt service cost; resulting in reduced spending (a reallocation of funds away from consumption to debt service) with little possibility of borrowing even more. Another hit to the economy!