It was one of those “good news was bad news” days on Wall Street Friday, as the impressive-looking jobs number gave the Fed a “thumbs up” for a rate hike in December. Economists were looking for 180,000 new jobs for October, but the 271,000 we saw was a blowout number. This number basically doubled September’s 137,000, and it said that the economy was a whole lot stronger right now than the mixed plate of figures we continue to see. This is great news for the economy, but it might be bad news for the stock market if the Federal Reserve decides to raise rates at its December meeting. Investors were non-committal on Friday, and stocks finished essentially flat and mixed.
We all know that the Fed has been eager to raise interest rates, and Friday’s jobs number supports a quarter-point rate hike in December. Short rates are near zero and have been so since 2008, and a 25 basis point rate hike should not be that big of a deal in terms of the stock market. The problem is that it probably WILL be a big deal in terms of the stock market. The dreaded “taper tantrum” in equity markets could occur, and then the Fed really has a big problem on its hands. Even if the Fed raises and attempts to reassure financial markets that a raise is necessary, the stock market could go ballistic to the downside.
The Fed has promised to “normalize” rates for years, and Fed critics say that the Fed has waited far too long. Critics of the Fed policy of zero interest rates say that it has distorted global financial markets in a big way. Deals and decisions have been made that would never have occurred in a more “normal” interest rate market. This has investors worried about the fallout if and when the Fed does reintroduce more normal interest rate levels. Savers at good, old-fashioned banks might cheer higher rates, and those savers have to be worn out having received sub-1% interest rates on money market funds and CDs for years.
Earnings continue to impress in this late part of earnings season, and by the likes of Facebook (FB), Disney (DIS), Goldman Sachs (GS) and JP Morgan (JPM), it appears that we are firing on all cylinders. The Gorilla was particularly impressed by Disney’s Chairman Bob Iger’s comments this week about Disney. It has pulled back a bit on cable TV worries, but what a company! With the new Star Wars movie coming out in early December, Disney seems solid despite its recent problems with ESPN. Iger was “hush-hush” on the storyline for Star Wars, but if any company had to be running the Star Wars franchise, Disney is probably the best one to do so. It will be great to see Han Solo and Chewbacca back in action!
As for the broader economy, it is doing its best despite the ongoing smattering of weak numbers we continue to see. Friday’s jobs report was a big plus, but it is still just one report. Housing has been strong lately as well, and that is another plus. The problem, though, is that consumers are still not jumping for joy. Various manufacturing reports have also been lackluster, and that is definitely cause for concern. The engine of the U.S. economy is running well, but it is just not firing on all cylinders. The overall earnings season was not that great, which has investors worried as we head into November and December.
What a Fed rate hike would do to investor confidence is the big wild card. There is no sign of inflation, so there are few reasons for the Fed to raise rates other than “normalizing” rates back to a more “real” level. The Fed’s “mandate” is to keep inflation in check and maximize employment levels, but we all know that the Fed has become involved in a whole lot more. Maximizing stock market prices seems to be part of its mandate now, and you have to admit, the Fed has done a spectacular job on that front since the S&P 500 bottomed at 666 in March of 2009. What an upward run we have seen since that dark time.
So a quarter-point rate hike might actually be a plus. Investors know that zero interest rates were not supposed to last forever, and with the recent gains we saw in October, a quarter-point hike might not cause more than just a shrug. It would get the Fed back on a more “normal” footing, and it would allow the Fed more leeway to react to any future financial crises. We will see what happens in December, but the timing and the strength of the U.S. economy seems strong enough to return to a higher interest rate environment. Normal interest rates are definitely preferable to “abnormal” rates of zero.
It was a solid week for stocks, though, and that said, the Gorilla wishes each and all a relaxing November weekend. We are in the sweet spot of the year for stock performance, and with the wind at our backs, we should see a strong close to what has been a challenging year for the stock market. We will be back in action on Monday, so again, have a great November weekend. The jobs report was a big plus, and it should help keep investors feeling bullish straight into the New Year!
See what Gorilla Trades has to say every week night, get the top stock market picks that the internet has to offer and start investing like the pros. Try the Gorilla Trades stock picking service free of charge now!
The Gorilla has gone mobile! Download our stock market app now for the hottest stock picks delivered right to your phone!