If battle scarred investors are looking for the Grinch who ruined this year’s share market Christmas party, they don’t have far to look.
The US Federal Reserve board chairman, Jerome Powell, is the face on the dartboard as the US and local share markets continue to sag back into correction country even as Santa warms up the sleigh.
The meeting of the US Federal Reserve this week has been a catalyst for some nasty market falls, along with bad news such as Johnson & Johnson’s asbestos scandal and insurance stocks falling after a court ruling jeopardised Obamacare.
Rate rises spooking markets
However, it is the prospect of continuing interest rate rises that is really spooking the US market, which is now at its lowest point since April and down more than 11% from its record September 20 record close.
On Wednesday in the US (Thursday our time) the US Fed is expected to announce another 25 basis point (0.25%) official interest rate rise – the fourth this year and the ninth since the Fed started raising rates in December 2015.
What markets will be looking closely at when the Fed report is released after the two day meeting is not so much this rate rise but the expectations for 2019.
So far the Fed has been indicating that it expects interest rates to have another three 25 basis point increases next year.
Markets hate rising rates and uncertainty
Share markets in general don’t like interest rate rises because they force up risk free returns and make buying shares less attractive but they also hate uncertainty – and there is plenty of that around this Fed meeting.
Given recent market falls and uncertainty, markets have already discounted the Fed’s trajectory and indicated they believe there will be only two rate rises in 2019.
However, there is considerable unrest around this prediction with some market players still saying there could be as many as four interest rate rises, showing the depth of uncertainty about the Fed’s strategy and the outlook for the US economy.
Trump “not happy’’
Adding to that uncertainty is US President Donald Trump, who has been strongly criticising the Fed and chairman, Jerome Powell, saying he is “being aggressive, far too aggressive’’ and that he is “not even a little bit happy’’ with the Fed and Powell.
Ostensibly the Fed is above political interference but there is little doubt that President Trump’s stance will have strengthened the hands of those Fed members who are dovish, or cautious about raising rates.
US economy still looks healthy
The picture for the Fed is even more complicated when you factor in the strong performance of the US economy, which is still flying along and producing plenty of jobs.
The hawks, those is favour of keeping up interest rate rises, will be concerned that the strength of the US economy which has been boosted by the Trump tax cuts could provoke a nasty round of inflation.
Indeed, that rising inflation could already be there but is just being masked by the strong fall in the price of oil to below US$50 a barrel.
Counter to this idea is that corporate profits are thought to have peaked, that the trade conflict with China will damage the economy and that growth in Asia and Europe is already slowing.
That is before you add in the chaos around Brexit and the fact that the US Fed is now effectively withdrawing US$50 billion a month of liquidity by reducing its GFC bloated balance sheet.
So it is a very complicated picture with many moving parts and opinions, and when investors only have a cloudy and uncertain view of what is coming, they tend to sell first and ask questions later.
Sell first, ask questions later
That is certainly happening now and here in Australia we are feeling the pain along with the rest of the world.
The ASX 200 traded down 1.22% yesterday and is now more than 13% off its highs recorded in late August.
It has been a very rough period to be a share market investor but at some point – potentially in 2019 – the contrarian investors will start to buy again once they are convinced that the level of market pessimism has become overblown.