Last week I had the following calendar reminder pop up from November 2015:
"According to Citigroup's chief US equity strategist Tobias Levkovich, stock prices will continue to rise well after the Federal Reserve begins lifting interest rates. The appeal of large U.S. stocks won't diminish until the Fed is "three or four" rate hikes into its tightening cycle—towards the end of next year. History has shown that stock markets don't peak until two years after the first increase of a monetary tightening cycle."
Here is the Fed rate hike pattern since 2015. You will note the "3" rate increases—the 4th is being debated in September (for serious consideration to implement in Q4).
Tobias Levkovich is a managing director and chief U.S. equity strategist for Citi Investment Research, and a member of Citi's Investment Strategy Committee. He is responsible for assessing the direction of the market, setting the firm's investment sector allocations and compiling its Recommended List.
I have tracked him closely since Q1/09 and he has been very accurate—his advice from November 2015 is not only important, but it times perfectly with insight that surfaced this week on Bloomberg:
"HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop."
There are concerns over lagging inflation and the impact another rate hike could have, but many believe the Fed could still hike the interest rate in Q4—likely in December. The bank has been targeting 2% inflation since 2012, but inflation has only averaged 1.3%.
Some policymakers argue that delaying another rate hike could lead to an inflation "overshoot" and create financial problems that would be difficult to unwind. There is a lot of pressure on the Federal Reserve to "normalize" monetary policy and get $4 trillion in debt under better control.
The U.S. economy is performing well and unemployment is around 4%. That could be enough to justify a rate hike, and if we see one (or a solid indication of one), it could be enough to justify a solid stock market correction—in particular, when this would coincide with the warnings I noted above.
Also note that in Q4 we will be dealing with issues in the European Union and the need for Congress to raise the U.S. Treasury debt limit and pass a budget (to prevent a government shutdown). In the past, this debt ceiling issue has deeply concerned the stock market.
Danny Deadlock is the founder and publisher of Microcap.com. He has over 30 years of experience with Canadian microcap companies listed on the TSX and TSX Venture Exchange.
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1) Statements and opinions expressed are the opinions of Danny Deadlock and not of Streetwise Reports or its officers. Danny Deadlock is wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the article preparation or editing so the author could speak independently about the sector. The author was not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the author to publish or syndicate this article.
Charts courtesy of Danny Deadlock