Stephen, imo rising interest rates are generally bad for the stock market...no matter what the Fed does, the suspicion will persist that more rate hikes are on the way. the only market that may well differentiate between 1/4 or 1/2 point is the bond market. a 1/2 point increase would probably help the long bond to rally further - the bond market likes to see a vigilant Fed. a 1/4 point hike would probably be seen as too little too late by the bond market. as for stocks, we have seen the mania ignore rising rates for quite some time now, as the Fed supplied more than ample liquidity through the back door. right now, they are very carefully allowing some of the repo's of late last year to expire...clearly they are trying to let some air out of the money supply explosion without creating a panic in the stock market. so the main question for the stock market is not by how much will they raise rates, but will they continue to mop up some of the excess liquidity.
and here's the crux of the Fed's problem: they have created a credit and asset bubble of historic proportions. unfortunately, there is no way to let the air out of a bubble slowly...you either allow it to inflate further by means of ever accelerating credit creation, or it pops. the Fed is well aware that the tail wags the dog right now, i.e. the stock market drives the economy instead of the other way around. so ask yourself, will they have the stones to see the bubble burst, or will they opt for letting it inflate even more? in view of the giant leverage in the market, one small wrong step can bring the whole edifice down...my suspicion is that easy Al will live up to his nick name and open the taps again at the first hint of trouble in the market.
btw, this is what's meant by moral hazard...the big speculators know full well how easy it is to panic the Fed into opening the spigots, thus they have no fear and bid stock prices to ridiculous valuations. there is however a natural limit to this as i've mentioned before: there simply is no free lunch. it may appear for a while as if there were, but in the end the markets will always punish excesses....
regards,
hb |
