Most Wall Street pros expect to see the Fed Funds rate rise between 300 and 375 basis points over the course of the next couple of years. At least that’s their belief…
The problem, though, is that it’s complete gibberish.
You see, the Fed front loaded an historic market rally beginning in March 2009. The financial mismanagement of Ben Bernanke and Janet Yellen was a concerted effort to create a wealth effect.
Unfortunately, their combined efforts have been an abysmal failure.
Here we are six years later and economic growth remains tepid at best – earning this recovery the title of most sluggish economic recovery in history. Worse, the current business cycle is now at 78 months. This is longer than 29 of the 33 previous expansions after a recession since 1854.
And the data indicates this expansion is on its last legs, as illustrated by the Atlanta Fed’s GDP NOW chart below…
Sans a miraculous turnaround in economic data, the U.S. economy is clearly heading for recession. And the Fed is completely helpless to stop the progression.
You see, the Fed has no ammunition at its disposal. Despite the recent rate hike, the Fed has no real room to lower rates. Now, they could go forward with negative rates like much of Europe, but there’s no reason to expect the Fed would fare any better than the ECB at generating economic activity.
No, the Fed is utterly impotent.
So what does this mean for investors?
A market selloff is in the cards in the very near future.
The markets are heavily priced. They are trading at roughly 19 ½ times earnings without any organic ability to grow their top or bottom lines.
It’s a recipe for disaster.
At best, the markets will trade flat for the next year. But believe me when I say that’s a best case scenario. A more likely scenario calls for the S&P 500 to see a 10-20% correction by 2Q2016.
But that doesn’t mean it’s time to flee the market.
You see, for the first time in several years, investors will be required to conduct real fundamental analysis when picking stocks. An accommodative Fed policy will no longer raise all the boats in the harbor.
In the end, that’s the way it should be. Price discovery depends on free and open markets without insulated government bureaucrats muddying the waters of economic discovery.
Don’t get me wrong, the Fed will continue to lead most people astray – it’s what they do best. And sadly, most Wall Street analysts will continue following the Fed right off the cliff.
But investors courageous enough to use fundamental analysis to find fairly priced stocks of companies growing their bottom lines will achieve lasting success.