It’s Time To Prepare For Another Rate Hike

Federal Reserve Chairwoman Janet Yellen gave a speech in Jackson Hole, Wyoming, on Friday, saying that the central bank will likely raise short-term interest rates at least once by the end of the year.

The first possible increase could be during the Fed’s policy meeting on Sept. 20-21. But according to the Wall Street Journal, any announcement will likely depend on the results of the Sept. 2 jobs report. If the data disappoint, then the door is still open for a possible rate hike in November or December.

#-ad_banner-#From the Journal:

“The Fed pushed rates to near zero in December 2008, kept them there for seven years and then nudged them up a quarter percentage point last December. Officials began the year expecting to raise rates four times in quarter-point increments but have delayed moving them because economic growth disappointed in the first half of the year and because they were uncertain about developments overseas and about the strength of the U.S. job market after some soft reports.

Ms. Yellen said her worries had dissipated.

‘While economic growth has not been rapid, it has been sufficient to generate further improvement in the labor market,’ Ms. Yellen said. Broad measures of labor market slack are improving, even though the unemployment rate has been steady most of the year near 5%, she added.”

As the Journal points out, the Fed traditionally cuts rates in an economic downturn to help spur borrowing, investing and spending. But with rates already so low, the Fed has little room for interest rate cuts or other stimulus measures if the economy sinks now.

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Bulls Are Already Heading For The Exits
One of my go-to resources outside of the mainstream financial media for in-depth information is Bespoke Investment Group. In a recent post on their blog, they note how the recent weekly sentiment poll from the American Association of Individual Investors shows the largest weekly decline in bullish sentiment since March, falling from 35.56% down to 29.42%. Bespoke notes that it’s the lowest weekly reading since the Brexit vote, and it also marks 43 straight weeks of a bullish sentiment reading below 40% and the 77th week in the last 78 weeks.

Take a look at the chart below…

As their research notes, bullish sentiment has declined, while bearish sentiment ticked up to just under 30% and is at its highest level since just after the Brexit vote. At 29.64%, bears now outnumber bulls despite the fact that the S&P 500 is just below all-time highs.

Looked at another way, the bulls and bears are evenly split. And while investor sentiment has long been a reliable indicator among market watchers and experts, we’ve been saying for weeks that with markets touching new all-time highs, a pullback is in order and that you should prepare. Watch the market closely as we approach the jobs report next Friday and the Fed meeting takes place less than three weeks later. Be prepared for a jolt in the market, depending on the outcome of the Fed’s decision and the prevailing sentiment of investors. But don’t let yourself panic if the data (or the announcement) disappoint.

As it currently stands, you should view any sort of pullback as a potential buying opportunity. Investors have a tendency to panic during sell-offs. This can cause them to sell when they should be buying, and potentially miss out on large gains. But as we’ve discussed recently, there is a strategy gives you the opportunity to buy quality stocks when they fall to discount levels. You can go here to learn more about how to prepare.