Who’s afraid of the Big Bad Fed?
After weeks of consternation, investors have decided either that the Federal Reserve will not raise interest rates at its policy meeting Nov. 16 or that, if it does, life as we know it will go on.
When the Fed’s monetary policy committee last met, Oct. 5, its statement of a “bias” toward raising short-term interest rates sent stock and bond markets into a swoon.
Now, many investors have decided that current prices for stocks and bonds already reflect a Fed rate hike, and some experts are predicting that the U.S. economy has slowed enough to prevent a third Fed rate increase in less than five months.
Friday’s scheduled reports from the Labor Department on October job growth, unemployment and average hourly earnings could rekindle interest-rate fears. Economists forecast that payrolls grew by 300,000 workers last month, with the unemployment rate unchanged at 4.2 percent. Hourly earnings are expected to be up by 0.2 or 0.3 percent.
Short of a shock in Friday’s numbers, however, the dominant mood appears to be to get past the November Fed meeting and move on with more certainty, whatever that means on Wall Street.
That view held sway Thursday in Europe, where markets rallied after the Bank of England and the European Central Bank–two Fed counterparts–raised rates.
“We saw (interest-rate) action in line with the consensus, so investors will no longer hold off from investing,” a Merrill Lynch strategist in London told Reuters. “The next rate hike is some way off. Investors have been bond vigilantes for some time; now they can be bond investors again.”
In reaction, the London stock market hit an eight-week high; the main Paris stock index closed at a record high for the fifth straight session; and German stocks gained 1 percent.
Abby Joseph Cohen, investment strategist for Goldman Sachs, told brokers Thursday that certainty is better than uncertainty, no matter how tentative.
“There’s been some concern about (higher) interest rates, but we believe it’s already discounted into the markets and should not have a significant impact.”
Looking back to last year’s Russian debt default, Asian financial gridlock and the near collapse of a major U.S. investment fund, she added, “Last year, we were looking at an economic black hole; an economic Armageddon was just around the corner. Instead, reality is far more pleasant.”
With the new-found attitude that the glass is now half-full, traders sent stocks and bonds broadly higher Thursday.
The Dow Jones industrial average, spurred by the prospect of a megabuck takeover battle for pharmaceutical giant Warner-Lambert, gained 30.58 points in heavy trading, to 10,639.64. Technology stocks continued their recent role as Wall Street’s locomotive, sending the Nasdaq composite index up 27.44, to its fifth straight record-high close, 3055.95.
Smokeless investing: On the eve of Friday’s premiere of the anti-tobacco industry movie “The Insider,” the non-profit Social Investment Forum indicated that many investors are giving a thumbs up to the movie’s message.
Assets of professionally managed investment funds that screen investments based on social concerns have soared 183 percent in the last two years to $1.49 trillion, the Washington-based group reported.
The No. 1 no-no in so-called socially responsible investment screening is tobacco-related investments, which are rejected by 96 percent of the portfolios surveyed.
The second pariah is gambling-related investments, shunned by 86 percent of the portfolios.
Followers of the socially responsible investment theme have seen their investments prosper relative to the broad market, in part because shares of tobacco, alcohol and gambling purveyors are slumping as a result of strategic and legal problems.
Local news: Chicago-based utility consultant Navigant Consulting plunged $9.44, to $19.50. The once high-flying stock, which peaked at $54.25 seven weeks ago, has been hit by disappointing financial results and questions about its accounting practices. Merrill Lynch withdrew its “buy” rating on the stock Thursday.
