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Heads up: Mike will be back with his next weekly column on Wednesday, Jan. 2. Enjoy the upcoming holiday week!
Today is "Fed Day." That is, the day the Federal Reserve announces whether it will raise short-term interest rates one more time in 2018 ... or take a pass until the new year.
Officials will also provide some guidance about their outlook for 2019. That will help investors figure out when the next hike is coming, and how many more we might see in 2019.
But before the news breaks this afternoon, I have some important advice for you:
"Don't lose your head because of the Fed!"
Over the years, some Fed meetings have been snoozers. Wall Street knew interest rates wouldn't change and the outlook would remain roughly the same. So, life went on after the news hit. Volatility was M.I.A.
At other times, everyone and their dogwalkers paid rapt attention to the Fed. That's because the Fed faced multiple policy options, and investors didn't really know which one they'd choose.
Result: They waited with bated breath for the news to hit, and as soon as it did, things went haywire. Stocks soared. Then they tanked. Then they soared again. The same kind of chaos swept through bonds, currencies, commodities and more.
This looks like one of the latter cases to me.
Everyone from The Wall Street Journal editorial board to President Trump is urging the Fed to sit on its hands today. But recent economic data has been solid enough to justify another hike, especially on the employment front. Meanwhile, various Fed policymakers have signaled, in their pre-meeting comments and speeches, that they're leaning in different directions.
Generally, Wall Street can anticipate what the Fed will do. But this time around, it could go one of at least three ways:
- Hike, but signal the next move will be delayed for a long while.
- Don't hike, but hint a move is coming at the Jan. 29-30 meeting.
- Or hike, and suggest multiple moves are still necessary next year.
The list of potential outcomes is long, and that means the potential exists for some explosive short-term moves in the broad markets.
That's especially true because institutional investors know that liquidity will soon dry up for the Christmas holiday. If they need to make big moves before 2018 is over, now's the time to do it.
But whether the Dow surges 200 points, tanks 300 points, or does both in the span of just a few hours, today, it doesn't change the big picture trend ...
Years of ridiculously easy monetary policy, out-of-control risk-taking in the corporate lending and borrowing arena, skyrocketing markets for assets both traditional and esoteric, and more have laid the groundwork for a nasty spill.
In a worst-case scenario, it could even usher in a "Final Crash." I'm talking about a downturn that is much broader and more painful than the narrower implosions in dot-com stocks and housing we experienced in the last two "down cycles."
But it would also be one that cleans out the financial rot, the speculative excesses and the policies that keep spurring boom-bust cycles — once and for all. That, in turn, would leave the underlying economy and the markets much safer and healthier, ushering in a better future for us all.
On that hopeful note, please allow me to wish you a happy and healthy holiday season. I appreciate your readership and loyalty, and look forward to helping you navigate the challenges headed our way safely and profitably.
Until next time,
Mike Larson
