When Is The Fed Finally Going To Raise Rates? It Doesn’t Matter.

In light of the overhyped anticipation of last week’s Fed non-decision on interest rates, we would like to offer a different answer to the question, “when is the Fed finally going to raise rates?”

Our answer: it really doesn’t matter.

We believe that the majority of pundits are asking the wrong question. Rather than focus on the “when,” we suggest investors focus on the “how.” Specifically, how should one’s portfolio be positioned in an era of slowly rising interest rates? After all, the Fed has stated repeatedly that they are going to raise rates when the data supports such a move. Were it not for an unexpected China currency devaluation and the return of volatility in the global financial markets caused by it, we think the central bank would have begun the process last week.

Courtesy of Strategas Research Partners

The “how” in our view of the world means how a portfolio should be diversified. We know that all assets rise over the very long term. However, in the short term, some assets do better than others based on where we are in the economic cycle. Based on our current thinking, we still believe US stocks should represent a significant portion of one’s portfolio. (The weighting of this asset depends on one’s risk tolerance and investment objectives.)

At this point, core inflation and wage growth seem to be the key determinants for the Fed’s decision. It’s hard to imagine a scenario where wages are growing, rates are low, and energy prices are cheap in which the consumer isn’t feeling flush. In other words, with a consumer-driven US economy, the case for higher corporate profits and increased US stock prices is compelling.

Finally, our good friends at Strategas Research Partners have done some great work on the seasonality of the US stock market. As shown in this chart, the final three months of the year have been the best performing months on average over the past 65 years. Normally we believe it’s a fool’s errand to time the markets, but if you’re ever looking for the opportunity to put cash to work, we think history is a good guide.