WASHINGTON, September 15, 2016 – After a tentative opening trade Thursday just after the opening bell, vastly oversold U.S. stock markets launched a modestly respectable rally for much of the day, soaring over +200 Dow points at one juncture. As of 3:45 p.m. EDT, just 15 minutes before the markets close, the Dow is challenging the +200 mark again. All three averages are up over one percent at this point, although it will take some concerted action to take back what’s been lost over roughly the last 10 trading days.
For the most part, we’re likely seeing an extreme oversold bounce here, as things have gotten way too negative lately. The main villain in the recent decline, interest rate fears notwithstanding, has been crude oil, which has been badly battered this week. WTI and Brent crude are up an unimpressive 0.29 cents and 0.66 cents respectively and futures traders seem determined to hold things down, this despite the upcoming annual shutdown of many U.S. refineries for maintenance.
But it’s the Federal Reserve’s interest rate policy that will continue to haunt markets through next week, until the central bank makes its official pronouncement, at least as far as the next month or two are concerned. Fears of a September interest rate hike have been savaging stocks and bonds for over a week, but the Fed will have to jack those rates up sooner rather than later.
Yet uncertainty still prevails. Or maybe not. As we’ve been crying in the wilderness over the last couple of weeks, this is an election year. The Federal Reserve, whether its central bankers admit it or not, is under enormous pressure from the Obama Administration to hold interest rates steady lest his anointed successor Hillary Clinton’s lose the 2016 Election to Donald Trump and the Deplorables. This is standard politics in Washington and its not really a surprise. The Fed, it is understood, is never to undermine the existing party in power, preferably the Democrats, and this election year is no exception.
For that reason, it would seem as if Donald Trump’s latest fusillade directed at the Fed, is actually nothing extraordinary. Except that as is his custom, he’s making this tradition very public, which is a big no-no among America’s oh-so-wise political class, as “Tyler Durden” points out in a ZeroHedge piece today:
“The Fed is being totally controlled politically,” exclaimed Donald Trump. Interest rates will remain low until January 1st, Trump went on, “because Obama wants to go out with no stock market disruptions.” The stock market “will remain at artificially high levels,” until the end of the year.
“If it was a choice between the right decision and a political decision… The Fed would choose the political decision”
“The Fed has become very political… beyond anything I would have thought possible…”
(Bold text is Tyler’s.)
This is nothing more than standard issue, really. But The Donald has mastered a way to make headlines out of the ordinary, while The Maven has not. Yet Trump is also doing a service for all his “Deplorable” friends in the electorate who may yet put him over the top in his battle against the Democrats, Soros, the elites, the wealthy and the lapdog media.
In general, the current low interest rate environment has been swell over the past several years for those individuals and institutions running their own portfolios. But none of the free money that’s sent stocks soaring, at least most of the time, has ever trickled down into the hands of financially beleaguered American citizens. The money has zero “velocity,” which is why the economy refuses to inflate—with consumer spending—the way the Fed wants.
In short, the Fed’s run out of bullets and has to attempt to restore normalcy as its money-flooding operations are only being recycled by the same individuals and companies and aren’t doing a thing for the economy. They have to hike, if only a teeny bit. But not until Hillary is elected.
Both The Maven and The Donald will be greatly surprised if this Fed has the nerve to jack up rates next week instead of December or beyond, when a new President will have to deal with it as Obama leaves Washington to spend the rest of his life on the links. The Fed could get aggressive, yes. But we—as well as most of Wall Street—happen to be betting that December is the more likely timeframe for a rate increase.
We’ll find out next week. We expect markets to remain very volatile in the meantime, however. There’s always a chance that the consensus could be wrong, and if it is, the Maven at least, will be very sorry he didn’t raise more cash a week or two ago.
We’ve only messed with a couple positions today, just because, adding a tiny number of shares to a slowly building position in Schwab’s large cap ETF, symbol: SCHX. We also put on a tiny position in RYT, the Guggenheim Equal Weight S&P Tech Index tracker. Both ETFs are commission free with our brokerage, but other similar ETFs will be commission free to nearly everyone trading with a discount house.
We put that RYT position on reluctantly, fearing to miss out on what may turn into an enormous tech rally next week. Finally, after a very long time, Apple (AAPL) is acting extraordinarily bullish lately, up now in the neighborhood of $115 per share, after dropping close to the century mark only a few days ago due, apparently, to disappointment that the new iPhone 7 is something less than the Second Coming. (Of Steve Jobs.)
Trading in Apple has always been idiotic. We simply can’t time it and aren’t going to chase it if it continues on its tear. So the next best way for a conservative investor to track both Apple and tech is to use something like RYT as a proxy. There are other more souped up versions of these ETFs that are not equal weight and therefore have more volatility. But volatility goes both up and down, and if you catch the wrong ride, you get hosed.
The equal weight variety of index tracking ETFs are a good bit safer. Yes, you’ll get the same ups and downs, but at what’s often a dramatically more leisurely and less scary pace. Aging Boomers like the Maven choose the less volatile equal weight ETFs for the most part. Helps us sleep better at night.
One caveat, however. The Guggenheim equal weight ETFs are not heavily traded. So we’re always careful with the bid and ask. A trader can often, but not always, undercut the ask price considerably when buying, so as a general rule, we don’t put in buy orders AT the ask. We always try to get these ETFs at a better price, and we’re prepared to walk away if we can’t get it. It’s the only way to play these investments. Or anything else for that matter.