Rate Hike Comes Into View, What To Do?

November 09, 2015

The latest jobs report, released Friday, blew estimates out of the water. Coming in at 271,000 new jobs for the month of October—exceeding market consensus by nearly 100,000—the number, which came accompanied by a drop in unemployment rates, bolstered the case for a Fed rate hike in December.

Should investors react in any way by perhaps rethinking long-bond and equity exposure? Here’s what two ETF strategists had to say:

Steve Blumenthal, chairman & CEO, CMG Capital Management Group, Philadelphia:

There was nothing but good news in the numbers. Good news is bad. With the Fed more likely to raise rates next month, the market moved lower, the 10-year Treasury yield shot up to 2.32 percent—it was under 2 percent just a few weeks ago. And the dollar gained against the yen and the euro.

Fed members have been more vocal about a December rate increase. Markets were pricing in a 56 percent chance of a hike at the December meeting with the expected hike taking the Fed target to .375. After Friday’s jobs report, the probability of a hike goes up.

Let’s take a step back and jump out of the noise. Investing is relatively simple when valuations are low; it becomes much riskier when valuations are high. Today stocks are richly priced, and when they’ve been this expensive in the past, the annualized 10-year returns have been low. Period.

Current high valuations (median P/E ratio of 20.2 as of Oct. 31, 2015) are telling us that forward returns will be in the 3-4 percent range before inflation and advisor fees. The Fed’s been driving the QE bus for seven years. That ride appears to be ending. The markets inflated with QE. We can’t expect the same response when the juice is pulled away.

My 2 cents is to stay patient, positioned and prepared to buy when the data is in your favor. Until then, reduce and hedge that equity exposure, tactically trade fixed income and overweight liquid alternatives such as long/short, managed futures, tactical all asset, etc.

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