A few months back nobody imagined that the stocks would rally if the Fed enacts a lift-off. But it happened in reality. On December 16, the Fed raised its key rate after almost a decade – though by a meager measure of 25 bps – but equities hardly paid heed and soared.
No doubt, this was a strange market behavior, but has strong reasons behind it. With the Fed giving cues of the rate hike timeline beforehand, the broader market digested it pretty well. Moreover, the Fed’s repeated vows to go slow with the hike trajectory made the global market comfortable with the move.
Rally Falters the Next Day… Why?
With that being said, we would like to note that the latest jump was short-lived in nature as the market lost steam the very next day. Volatility in the market soared over 4.2% (as depicted by the return of iPath S&P 500 VIX ST Futures ETN (VXX)) on December 17 while the fund advanced over 4.6% after hours. Among the top ETFs, investors saw (SPY – ETF report) and (QQQ – ETF report) lose about 1.5% and (DIA – ETF report) move lower by over 1.4% on the day. These funds extended losses in after-market trading.
Things are also not out of the woods globally. Broader commodities, which are linked to the U.S. dollar are lackluster. Oil prices are to feel more pressure thanks to the ongoing demand-supply issues and a stronger greenback. Higher rates would draw more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. Also, a strong greenback would make exports pricier.
In any case, the U.S. manufacturing sector is reeling under pressure for quite some time now. Now the greenback-induced woe would compound their suffering. Thus, the market may seem steady initially and appears to absorb the first rate hike easily, but is less likely to hold their head high in the medium term.
Tepid Corporate Outlook for 4Q15 & 1Q16
In fact, several market experts including Goldman Sachs see 2016 as a down year for stocks. Higher interest rates post lift-off will result in a stronger greenback which will weigh on the profit outlook of multinationals having considerable exposure to foreign lands.
As per Zacks Earnings Trend issued on December 4, 2015, the S&P 500 earnings are expected to slip 6.5% in the final quarter of 2015 on 3.4% lower revenues while earnings are projected to fall 0.8% on 2% revenue gains. From second-quarter 2016 onward, both top-and-bottom lines are expected to grow hand in hand.
Leave A Comment