Five Market Drivers that are Much More Important than the Fed

 

Not a day goes by when we don’t read or hear about the Fed or interest rates. It’s the longest running “will they or won’t they?” since Brad and Angelina were engaged for the better part of a decade. Probably just as relevant to our actual lives too.

The Federal Reserve has been doing this dance with investors for years—hinting that they might raise the federal funds rate from near zero when unemployment reaches a certain threshold, then pushing it back, then hinting at a rate hike again, then backing off again.

It’s been seven years now since the Fed pushed short-term interest rates down to almost nothing. They’ve been threatening to raise the rates for nearly that long—or at least it seems that way.

So why, all these years later, are we still so hung up on when the Fed will finally raise the rates? Tim Lutts, president and chief investment strategist of Cabot Investing Advice, made a very rational point, one that I haven’t heard any Wall Street pundits utter: that higher interest rates are already priced in to the market.

I tend to agree. Investors, particularly the institutions, have seen this coming for years. We used to see big market swings in the days leading up to and after the monthly Fed announcements. We don’t see that kind of volatility any more. Whatever empty promise Janet Yellen is about to make, it’s already been baked into the cake for years.

Thus, the impending interest rate hike, whenever it happens, isn’t nearly as important as the financial headlines and CNBC talking heads will have you believe. There are plenty of other, more lightly publicized issues out there that are far more pertinent to your long- and medium-term portfolio.

Here are five that are worth keeping a close eye on—or at least a closer eye than on the Fed:

1. The market has bounced back quite nicely from its late-summer slump.

Stocks look a lot better now than they did two months ago. After a turbulent six weeks, the market has seemingly righted the ship, recovering more than half its losses. With the dust finally settling, the damage hasn’t been all that bad. The S&P 500 is down just over 2% year-to-date, and just over 3% since the traditional “Sell in May” period began. For all the panic, and given that we were long overdue for a correction, those aren’t exactly catastrophic numbers.

Now, as my colleague Tyler Laundon of Cabot Small-Cap Confidential wrote the other day, the traditional “worst six months” for the market are coming to a close, and the always-fruitful holiday season is fast approaching. It appears the worst may be behind us … which means it’s time to start buying again!

2. Oil and food prices are still low. 

The price of oil is less than $50 a barrel. That you probably knew already. What you may not have known is that food prices are also low. Corn, soybeans, wheat—all of it is at or near five-year lows. As a result, consumers have a little more cash to spend from all the money they’re saving at the pump and at the grocery checkout. That’s another reason to be optimistic about the fast-approaching holiday season, and it could bode well for retail stocks in the coming months.

3. The strong dollar is weighing heavily on large-cap earnings.

Despite the uptick in discretionary consumer spending, don’t expect much this earnings season, at least from the big boys. Analysts are expecting a second consecutive quarter of earnings declines among companies that comprise the S&P 500. If true, it will be the first time that has happened since 2009. Not a good trend.

A strong dollar is the main culprit, as 40% of large caps’ revenue comes from overseas operations. A comparatively weaker yen, yuan and euro are thus watering down large multinationals’ sales in places like Japan, China and Europe. Small caps don’t have that problem: most of them do their business strictly in the U.S.

So while you shouldn’t expect Q3 earnings to give large caps much of a bump, we could see some nice earnings-fueled bumps for small- and mid-cap companies in the coming weeks, now that the market seems to be getting healthy.

4. Buybacks are propping up this market. 

Even as U.S. large caps are expected to report negative earnings growth in back-to-back quarters for the first time in six years, and China is tanking, and Greece continues to stub its toe, stocks—some large caps included—are still on the uptick. Why? Because companies are buying their own stock at a record pace, spending a whopping $936 billion on buybacks over the last 12 months.

More buybacks means fewer shares outstanding, thus boosting earnings per share. At a time when actual earnings are slipping, buybacks are making EPS growth enticing enough to convince investors to buy companies with profits that are on the downslope.

5. Housing has gotten a second wind.

Construction on new homes is rising at its fastest pace in eight years. Purchases of previously owned homes are at an eight-and-a-half-year high. With inventories down and demand surging, listed properties are being snatched up in an average of just 34 days, the quickest in the four years of record-keeping.

All of these numbers are reasons to be bullish on U.S. housing right now. Housing and construction stocks are still pretty beaten down from the recent correction—just look at Caterpillar’s (CAT) chart—but given the strong data, this could be a nice entry point into homebuilders, construction companies and REITs. 


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