There is a lot of focus on the Federal Open Market Committee's (FOMC) discussions and actions that will be made public at 2pm today.
They will likely not raise interest rates, but the wording of their statement and the "dot plot" of expected future interest rate increases by committee members will be scrutinized by financial market participants for clues of what to expect next.
There may be some potential for increased levels of volatility.
In a nutshell, the Fed is anxious to get interest rates back to more "normal" levels. What is considered normal is certainly open to debate and in fact smarter economic minds than mine continue to debate it.
To us what is evident is that, at the moment, the US economy is not as robust as FOMC members had hoped back in December when they raised the target rate by .25%.
We cover all the details in our weekly webinar, which was recorded yesterday and can be found on our website at
Suffice it to say that the domestic economy (which is powered by the US consumer) has suffered from the drag of the struggling global economy. Until the consumer spends more, the US economy will struggle. Growing employment numbers have not inspired the consumer to date. There is debate as to whether the consumer is saving their earnings to spend in the near-term (although earnings are not increasing with increasing employment, which suggests that the employment growth is in lowering paying jobs) or whether as we have suggested in the past that consumer demographics are changing with the aging population: baby boomers saving for retirement and millennials who have significantly less money to spend.
How does this impact investing?
US equities represent over 50% of the benchmark global equity index.
If the consumer does not spend, sales and ultimately earnings, which are about to enter a 4th quarter of negative growth, will continue to stagnate.
Price to earnings ratios are at a very expensive 16.1 relative to the 10 year average of 14.2. If earnings are in decline and continue that way, stocks are not a prudent investment, until that price to earnings picture changes (i.e. moves lower).
With politics in Washington at a virtual stalemate (no fiscal stimulus is coming anytime soon), it is left to the Fed to inspire the consumer, to get them back into buying mode.
But is that within their power?
Higher interest rates will express confidence in the US economy (but may have a very significant and negative impact on those who have too much debt, households, businesses and developing nations) .
Fed concern over the US economy will not inspire the consumer.
Certainly the Fed is in a very difficult position and as important as their actions and words may be, uncertainty will remain and with it heightened levels of volatility.
For these reasons we remain cautious and prudent: overweight cash and government securities, underweight equities.
If you would like to receive this blog directly to your inbox, please email email@example.com
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist