Tahoe Market Pulse: Piling on the criticism of Janet Yellen
February 24, 2016
It is frustrating to watch Fed Chairperson Janet Yellen testify on Capitol Hill. Congressmen grill her on policy and why the Fed isn't helping the economy.
At least the Fed is doing something. Our dysfunctional congress has done little or nothing to help the economy! That said, when it comes to Fed criticism I, too, will do some piling on.
In her testimony, Janet Yellen stuck to her plans to raise rates four times this year though she said the global situation might impact that. You think? She didn't quite rule out negative interest rates. Stocks fell as she spoke.
Yellen admitted that she (read the Fed) was surprised by the dollar's strength and the oil sell-off. No doubt she was also surprised by the economy's second half weakness last year.
The Federal Reserve has an army of economists and analysts, but when it comes to forecasting they have been way off the mark year after year about GDP.
While Yellen expects the Fed to be raising rates this year, in the financial futures market where people put their money on the line the first rate increase is expected in 2018.
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Yes, three years out. That means investors don't believe the Fed and they don't expect economic growth fast enough to tolerate increases.
Recent economic data point to slow GDP growth, not an acceleration. Just more of the same (two percent, give or take). As a result, no one expects S&P earnings to rise more than a token this year.
The market is pricing some sectors as if a recession is a certainty. I disagree. Recessions typically follow excesses, such as soaring oil prices, mindless mortgage lending and skyrocketing home prices.
No sign of such excesses now. Stock prices ahead of a recession are often grossly overvalued. They aren't. The S&P 500 is trading for 15-16 times earnings, a historically average level.
A case can be made for higher prices in a recession-free year. I can't make one for much lower prices even in a recession.
Lower, yes, but not by much as long as yields for alternative investments remain low. Now it appears they will remain low longer than investors had expected. A lot longer.
David Vomund is an Incline Village-based fee-only Registered Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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