After soft US jobs data, Fed likely to hold fire on interest rates: Strategist
On the heels of an August jobs report that was strong but my no means a grand slam, one top strategist believes investors can easily determine what's to come from the Federal Reserve this year.
The August jobs report showed that the U.S. added 151,000 jobs, fewer than most Wall Street economists were expecting, while the unemployment rate remained unchanged at 4.9 percent. With that in mind, Dwyer believes that investors can operate under the notion that the Fed will not make a move in 2016.
"They told you it's going to be a fat pitch down the middle. Are you going to take the strike or hit a homer?" asked Tony Dwyer on CNBC's "Fast Money" this week.
Markets are fixated on when the Fed will begin withdrawing some of its crisis-era stimulus, with interest rates at rock-bottom levels. Conventional wisdom suggested the central bank could hikeas early as Septemberafter months of delay and speculation, but Dwyer thinks differently.
"I don't think they'll hike in September," explained Canaccord Genuity's chief market strategist. "The economic cycle is not about duration. The economic cycle is driven by Fed policy, short-term interest rates, which create strength in the long-end of the curve."
Short term pullback?
Often referred to as one of Wall Street's biggest bulls, Dwyer added that the potential for near-term weakness could provide investors with buying opportunities down the road.
However, Dwyer told CNBC the market's upward bias hasn't changed, despite fear having gripped investors after the U.K.'s Brexit vote. At least for now fundamentals are still supportive of a rally.
"Corrections are natural, normal and healthy until they actually happen," explained Dwyer, who went neutral on stocks six weeks ago and is now waiting for a period of consolidation to take effect.
"You just don't want to sell a market. You can get less aggressive, but it's hard to get aggressive on weakness if you're already aggressive," he added. "Credit is available and, as long as that is the case, you're going to have buy-backs and M&A."
Looking ahead to next year, Dwyer's firm's target price for the S&P 500 Index is 2,340. To get there, Dwyer cited several key factors to trigger the short-term pullback he's expecting.
That includes the VIX, otherwise known as the fear index, hitting 20. Following the August jobs report, the index dropped to 11.93, its lowest level in nearly two weeks.
"In 2013, [there was] historically low volatility in the very low teens as the VIX had been down for a very long time," explained Dwyer. "Everybody was thinking 'you're going to have to have a spike in volatility, which is bad for stocks."
Now, Dwyer is looking for a comparable road map of a rising VIX to bring stocks down before an eventual breakout. From there, when the Fed eventually hikes interest rates, he feels traders will have ample time to plan and react.
Looking at the VIX chart, you can see we are down at the lower support end of the VIX. These are levels, seen as rare and low. And usually they rally from here. So keep that in mind! The last few times we are down this low we usually rally extensively. But we will keep our members alerted.
"If the Fed goes to 2 percent, and in the long-end stays at 1.5, you've inverted the curve," concluded Dywer. An inverted yield curve, in which rates yield more in the short term than the longer-term, is widely considered to be a signal for an economic pullback.
"When the Fed starts to raise rates, it takes an average of 21 months to invert the curve," he said. "Once you invest the curve, the mean inversion is fifteen months, so you have three years from when the Fed starts to raise rates until you actually go into a recession."
- Source : Cnbc.
