Warning! The Fed Could Kill Stocks This Week

Jul. 8.14 | About: SPDR S&P (SPY)


Stocks have enjoyed quite the run over the past twelve months, with the SPDR S&P 500 (SPY) up 21.2%.

However, a new macro factor is pending incorporation into investment analysis, and it is rising interest rates.

Fed views vary as to the optimal time to raise rates, but the discussion is intensifying. This week, several opportunities exist for the bad news to get more potent.

Watch out for the Fed poison pill that could upset the system this week and deter further capital appreciation. The Federal Reserve is scheduled to release the minutes of its June Federal Open Market Committee (FOMC) meeting, and I'm concerned the details could deter capital investment from equities.

Mark your calendar for Wednesday July 9th at 2:00 PM ET. That's the day and the hour the Federal Reserve releases its FOMC meeting minutes for the June meeting. Based on recent commentary and discussion, I am concerned the minutes could offer further notation capable of disrupting our recent upward path. Passive stakeholders in the SPDR S&P 500 ETF (NYSEARCA:SPY) are at risk and all market players are in harm's way. Therefore, I'm suggesting setting money aside if you can and taking risk off the table, especially for holders of the SPY security.

Now, I'm well aware of my own Summer Forecast, which stated that several critical obstacles had cleared away to allow for market rise. There's just one problem. One of those factors has reemerged and is important enough to stifle stocks. The fourth factor, which was the Federal Reserve's inappropriate (in my opinion) communication of its Fed Funds Rate forecast early this year; it is back to haunt investors. The Fed's forecast showed its expectation for the interest rate that the Fed itself controls would increase in 2015. If the Fed thought the rate would rise next year, it seemed to be effectively communicating its plans to hike it. After all, the Fed harped on transparency throughout Ben Bernanke's reign, so why should we expect anything but a communication of its plans?

An immediate understanding of the complications the forecast would cause Fed Chief Yellen to qualify the forecast as an expectation and not Fed plans. Still, it was enough to set fear free on U.S. exchanges and it hampered stocks for a bit.

Then, Chicago Fed Bank President Charles Evans spoke in Istanbul. Evans communicated his expectation that the Fed Funds Rate would not be increased until 2016. More specifically, he said 2016 would be the optimal target date. The market celebrated as the obstacle was cleared and stocks were poised to rise all summer long on strong economic projections.

and then on June 29th…

St. Louis Fed Bank President Bullard appeared on Fox News' Sunday Morning with Maria Bartiromo and said he would like to raise rates by the end of the first quarter of next year. Granted, he also said that he was ahead of the Federal Open Market Committee as to when he would like to raise rates. Bullard sees the unemployment rate dropping below 6% in the second half of this year and thinks inflation could be close to 2.0% by the close of the year. He said he felt as though markets didn't realize how close to post-war normal we are today, and normal calls for a normal Fed Funds target rate of 4% to 4.25%, though he said that rate would be for 5 to 10 years from now. He was not overly concerned about inflation today, but he was clearly noting and noticing that inflation was rising, and that seemed to spur his interest in raising rates sooner than his colleagues prefer.

Market ETF




SPDR S&P 500








PowerShares QQQ (NASDAQ:QQQ)




iShares Russell 2000 (NYSEARCA:IWM)




Click to enlarge

We have seen this factor affect stocks more than once this year, and I believe concern about the pending Fed release hurt stocks on Monday. Each of the broader market indexes shown above here declined. The market knows that as time progresses, talk of rate increases will only get louder and eventually be followed by action. Thus, this week's Fed release is likely to include such discussion.

As the market tends to lead the economy by 6 months or so, smart money will start to set capital aside or find new places to park it, at least around the inflection driving event of market acceptance of pending rate increase.

The offset is economic growth, and Bullard says most economists see more than 3% growth through the rest of the year. However, the market knows the economy has been improving, as illustrated by the trailing-twelve-month performances of these indexes.

The new information that will have to be incorporated into investment analysis will be a rising cost of capital for corporations, and that's bad news for most stocks. Therefore, I suggest passive investors in the SPDR S&P 500 ETF consider setting capital aside this week if they can nimbly do so, as every time the Fed comes to the wire, it threatens them, and it's coming to the wire on Wednesday. Regional Fed bank presidents will be speaking all week long as well, and could add color to the discussion - you can see the entire schedule at my blog.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.