Stocktake: December rate hike need not spell doom

Corrections are unavoidable and using Twitter as an investment guide

Fed chairman Janet Yellen: last week’s unexpectedly hawkish  message means a December hike is now seen as a 50/50 bet. Photograph: Joshua Roberts/Reuters

Fed chairman Janet Yellen: last week’s unexpectedly hawkish message means a December hike is now seen as a 50/50 bet. Photograph: Joshua Roberts/Reuters

 

A December interest rate hike is back on the table, the US’s Federal Reserve signalled last week. Should investors care?

Well, there’s no doubt they do: after nine years of zero interest rates, investors have feverishly speculated throughout 2015 as to when lift-off was likely. Economic uncertainty has meant the date kept getting pushed back, but last week’s unexpectedly hawkish Fed message means a December hike is now seen as a 50/50 bet.

It’s arguably of little importance as to whether rates are raised in December or in early 2016. A quarter percentage point hike is an insignificant one.

Additionally, whereas rates rose quickly during past cycles, the Fed has signalled they will be kept extremely low in the coming years.

Furthermore, investors sometimes forget that bull markets are typically not killed off by the first rate hike. Rather, equities tend to underperform later in the rate-rising cycle, indicating any negative effects may be delayed into late 2016 or beyond.

Renewed financial fragility would surely result in the Fed, which is famously sensitive to market concerns, deciding to wait and see.

If market sentiment remains firm, however, a December rate hike is unlikely to spook investors.

Surviving the stock correction

Alas, many investors missed out on the gains. As money manager Barry Ritholtz quipped last week, the mood in August was one of “Liquidate my holdings! Give me bottled water and gold and I’m moving to a cave.”

Stocktake’s contention was always that we were witnessing a correction, rather than the beginnings of a bear market. That’s partly because the usual bear market triggers – recession, commodity spikes, aggressive interest rate hikes, extreme valuations – were absent.

Fundamental considerations aside, it typically pays to be optimistic and to remember the old adage about bull markets climbing a wall of worry; quite simply, most market declines do not become bear markets.

Investors should remember corrections are both inevitable and unavoidable. JPMorgan data shows intra-year declines have averaged 14.2 per cent since 1980; stocks gained in 27 of those 35 years, with the S&P 500 enjoying an 18-fold rise during that time.

Though relatively minor (the S&P 500 declined 12 per cent) and brief, the recent correction nevertheless engendered no shortage of hysteria, inspiring headlines such as ‘Bearmageddon is coming’ and ‘Dow 5,000? Yes, it could happen’.

Can you imagine if – no, when – stocks suffer a true bear market, with declines being steeper and longer? Expect apocalyptic coverage aplenty.

Does the Twitter ETF make sense?

So says US outfit Market Prophit, which hopes to launch an ETF based on its Social Media Sentiment Index.

The plan is to track the Twitter feeds of some 220,000 traders and to take long or short positions in the 25 most-talked about stocks.

The idea has been dismissed as a dangerous gimmick, but the index has handily outperformed the S&P 500 since being launched in May.

That may not be a fluke; this looks like a momentum play, and momentum strategies have historically outperformed the market.

Momentum stocks are volatile, however, and prone to nerve-racking reversals.

It’s easier to hold on during the tough times if you believe your strategy has a strong fundamental rationale; the thought that you’re mindlessly copying amateur Twitter users might not be a comforting one for investors.

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