So the Fed has finally done it. Chair Janet Yellen and her merry crew have made a great switch from being almost unanimous about leaving interest rates unchanged to being unanimous about a quarter point increase. In so doing, they have underlined that there is much more to the decision than the rate of inflation.
I believe that, political considerations aside, the Fed might well have waited until the New Year, as I originally expected, before ending the seven-year stretch of 0.25% base rate. An increase now is not needed to stop inflation shooting past the 2% target.
Yellen as good as said so after the decision was announced. She said future interest rate rises would be slower than her previous projections – in other words the upward pressure on interest rates has actually eased. However, the sheer weight of expectation for a rise now, and the psychological impact of postponing the move for even one more month, was too great.
Yellen also said: “It is important not to overblow the significance of the first move. It’s only 25 basis points.”
She cannot be so naïve. This was one small step for a woman but a giant leap for the stock market. We have started the long haul back to normality after the financial crisis. After a torrid summer and a disappointing autumn, shares have at last been given a massive boost. Well done everyone who held their nerve.
The Bank of England may not rush to follow. Here the political pressure is to hold rates down to save the Government money at the expense of savers. We will also get more warning. The last vote was 8-1 against raising UK rates and it will take at least two months to switch over to 4-5. Nonetheless, the move will surely come next year and it will be another boost when it happens. Welcome to the new old normal.
Shares to Consider Before the Market Rally
So, where to look for share purchases before the market rises further? It is still very early in the cycle to be buying into the heavily battered oil and resources sectors but those willing to grit their teeth and hold for the long term will eventually be rewarded. Eventually is the key word.
The three listed supermarkets have similarly been under the cosh. Sainsbury (SBRY), which I hold, remains the best prospect to withstand the onslaught from Aldi and Lidl. There is no sign of a turnaround yet at Morrison (MRW) and Tesco (TSCO) continues to drift.
Banks have also been subdued and here there are better, shorter term, prospects. I still favour Lloyds (LLOY), which is paying a dividend and will move higher as soon as the government has sold off the taxpayers’ stake. Royal Bank of Scotland (RBS) remains the worst investment. If you need to ask why, you probably shouldn’t be investing.
Housebuilders have had a far better couple of years and while the best chance to buy has long since gone they are worth holding onto. The wider construction sector may do better in 2016 assuming that the hiatus in government projects before the election is giving way to a bit more spending. Outsourcing stocks have had a tough time, which they brought on themselves, but could be coming out of the wilderness.
I’m not keen on manufacturers, though I’m sad to knock a sector that has shown remarkable resilience in the face of adversity. This once dominant part of the economy will continue to shrink. I would far rather stick to defensive stocks such as utilities and pharmaceuticals.
Christmas Break
As usual, this column will not appear over the Christmas period and I am in fact taking a longer break than usual because I will be delivering a series of lectures in January. Until my weekly missive returns on January 29 I wish all readers a happy Christmas and a prosperous start to the New Year.
