One Man’s Opinion: Will Equities Move Higher Until The Fed Starts To Raise Rates?

Janet Yellen is expected to be confirmed as the next head of the Federal Reserve, and the US employment number is her main concern. She has made it adequately clear that she’s single-mindedly focused on jobs and not really concerned about the inflation aspect or any other data point, said David Robin, managing director and co-head of financial futures and options at Newedge LLC.

The Fed has done some heavy lifting since the early part of September to retake control of the policy path message; that rates are going to be on hold for an extended period and tapering is not even on the near-term horizon though it was certainly part of the discussion, however, it’s not a viable policy path.

Everybody knows Janet Yellen is going to be to the dovish side of Chairman Bernanke when she takes over. She made it very clear in her testimony that she’s even further to the dovish side and any question that she’s going to waver from her single-minded task of regenerating economic growth should be put to rest. Her commitment on that issue is pretty solid, and the markets are fairly clear on that message as well, David said.

When the taper talk first started in May, the markets tended to believe that the end of QE was a necessary and sufficient condition for rates to start rising, said Jonathon Shelon, CIO at JP Morgan Private Bank. But, since September, the markets no longer believe tapering is equivalent to tightening. They have changed expectations and actually believe rates may not rise at least until late in 2015. So mission accomplished; the Fed has been able to extend that period – when tapering ends and when tightening begins, he noted.

Asked if the Fed understands how difficult it is to start unwinding the central bank’s balance-sheet, David said the Fed recognises the difficulties in unwinding and also understands the difficulty in managing the massage. The central bank realizes it’s hard to separate tapering from tightening. There’s a relatively high level of interest in starting the tapering at some point. But until the economic message is clear that the growth path is convincingly sustainable, they are unlikely to take the risk of tapering and risk again the May like situation of losing control of expectational pricing (of bonds), he added.

Asked if stocks will continue to move higher until the Fed makes a move in the future that convinces markets that the Fed is going to tighten, Jon answered in affirmative. Early in 2013, valuations were attractive and earnings growth was reasonable. There were a lot of re-ratings in the price multiples. Stocks now are higher by nearly 30 percent. A lot of individuals have been sitting by the sidelines, waiting for the next five percent correction that never occurred though the markets witnessed many little dips. There’s a lot of cash waiting to be invested, which will happen in 2014, Jon concluded.

You can watch the video here.