When It Comes to Rising Rates, Perception May be More Dangerous Than Reality

This first appeared at Empire Financial Research.

? I was talking with a friend the other day about whether with inflation sprinting ahead and interest rates inching higher, the market's bull run is over...?

By now, most investors likely know the old adage: Don't fight the Fed.?

But is this that "don't fight the Fed" moment??

Rates are rising... and this market has so little conviction that all it takes is a whiff of wind from the other direction to knock things down.

However, are rates rising enough to make a difference? And if things get knocked down, how far is "down"? And... how long will the market stay down?

?Not being a macro guy, I defer to others... So I won't quibble with the opinions of a few of my colleagues at Empire, who feel strongly that this pandemic-inspired inflation is not currently the boogeyman it has been made it out to be...

And that's even as inflation roars ahead at the fastest clip since the 1980s – something we all see, feel, and hear about daily.

? But it's not just prices at the grocery store, restaurants, car dealer or gas station...?

Searching transcripts on data research firm Sentieo, the word "inflation" tripled over the past two and a half months from the same period ending in mid-January 2020... a period during which rates on 10-year U.S. Treasurys were mostly higher than they are today. Take a look...?

?All that inflation has put interest rates front-and-center as the worry du jour. An apparent change in mindset by the Fed hasn't eased these fears, either.

And it's not just commentators on TV or every armchair economist in my social media feed talking about it...?

Just last Friday, Jamie Dimon – the CEO of financial-services giant JPMorgan Chase (JPM) – spooked the market when he said that he believes there will be more like "six or seven" rate hikes this year, rather than the four the market is expecting.*

? Dimon's reasoning was that 'the table is set' for growth, "with obviously the negative being inflation and how that gets navigated and stuff like that."

He went on to say..?

"I grew up in the world where [ex-Fed Chief] Paul Volcker raised up interest rates, 200 basis points, on a Saturday night. And this whole notion that somehow, it's going to be sweet and gentle and no one's ever going to be surprised, I think, is a mistake."

(*Keep in mind that Dimon made his comments the same day JPM shares got crushed on disappointing earnings guidance. And the higher rates go, the better it is for bank earnings. There's always a motive!)

But there's something else that shouldn't be ignored... That's the dynamic involved in trying to control inflation by raising rates without killing the golden goose – in this case, stocks.

It's a delicate balance, and it was laid out extremely well in an excellent discussion on last week's always insightful On the Tape podcast, with guests Porter Collins and Vincent Daniel of Seawolf Capital.?

Their basic message was that if things get out of hand, the Fed will "blink."?

That is, regardless of what policymakers may have signaled, the rate czars will have no choice but back off higher rates if they wind up hurting the economy... and, in a significant way, the market.

? That leads to perhaps the most important question...?

How high will rates have to go before that's a serious issue?

My colleague Enrique Abeyta doesn't believe were there yet... or anywhere close. As he wrote last week in his Empire Elite Trader newsletter...

"When the Fed started raising rates in June 1999 to when it stopped in May 2000, the stock market's performance was excellent. On average, the S&P 500 was up 12% and the Nasdaq was up 50%... but at one point, it was even up 100%.

"In fact, the stock market didn't crack until the Fed stopped raising rates."

And then the catalyst for the crash was (take your pick) either was the rate of the increase (up nearly 60%) or the absolute rate (nearly 7%), prompting Enrique to observe...

Neither of those are anywhere near what we're looking at today.

?He's right, but there's one other thing not to lose sight of...

?There's a big difference between 2000 and now: the sheer speed that information travels – often in 280 characters or less – and much of it is being shot out of a firehose. And there is often no distinguishing between fact and faction.?

? So... Fight the Fed? Don't fight the Fed?

Everybody’s got an opinion on when the magic moment to worry will be. Just remember that in a market with as little conviction as this one, perception can be more dangerous than reality.

As always, feel free to reach out via e-mail at [email protected]. And if you're on Twitter, feel free to follow me there at @herbgreenberg. My DMs are open. I look forward to hearing from you.