The US Federal Reserve meets today.
It’s expected to keep rates on hold. The Fed doesn’t want to alarm markets and raise rates in back-to-back meetings. Don’t be surprised if it raises rates at the next meeting, however. The Fed’s likely to see the positive side of the ‘data’.
Of course, the Fed doesn’t really care about the ‘data’…
Make no mistake: The Fed is focused on the Dow Jones Industrial Average. The Dow Jones is an index composed of 30 of the world’s largest companies, including Goldman Sachs Group [NYSE:GS], Microsoft Corporation [NASDAQ:MSFT] and Walt Disney Company [NYSE:DIS].
The Dow surged through the 20,000-point psychological level last week. Goldman Sachs was the main contributor to the move. Goldman added about 36.6% to the Dow’s 1600-point post-election rally.
If you bought Goldman Sachs before the rally, nice job. But I wouldn’t buy it now. The Dow looks ‘toppy’ and is trading down at 19,836 points.
Plus, inflation expectations are picking up. US inflation rose to 1.6% in the fourth quarter of 2016 — the highest reading in over two years. That’s why the Fed will probably want to raise rates soon. It doesn’t want to be blamed for causing a stock market bubble.
The Fed has indicated that it wants to raise rates three times this year. If it starts raising sooner rather than later, financial markets could become nervous. Don’t forget, as discussed yesterday, the stock market rally looks to be over. Trump’s main policies are probably going to get delayed.
The story gets worse…
Brexit is about to send major shock waves through financial markets. While the Dow might try to re-test its high this week, we’re looking at a 10–15% stock market correction…and it should start any day now. Remember, when the US market falls, the Aussie market should follow. We tend to follow the US stock market — the largest in the world.
Brexit is coming at you…
The Guardian reported yesterday:
‘Theresa May’s Brexit bill is likely to pass through the Commons without major amendment next week, as Conservative rebels are backing away from supporting changes proposed by Labour or other opposition parties.
‘A band of Tory MPs fighting against a hard Brexit are indicating they have been largely satisfied by the prime minister’s promise of a white paper, which they believe could be published as early as Thursday.
‘Labour and the Liberal Democrats now believe there is very little chance of getting enough cross-party votes for amendments. They had hoped to win support on issues such as guaranteeing the rights of EU nationals, and a more meaningful vote at the end of the two-year negotiations or protections in the House of Commons.’
In other words, while it won’t be an overnight process, Brexit is on track to get the green light before 31 March. That should kick-start a two-year negotiation process to leave the European Union (EU).
It has been a long time coming…
The UK voted for Brexit on 23 June last year. It was a crazy time for punters. Here’s what happened to the Dow Jones following the vote:
[Click to enlarge]
The stock market plummeted. The two-day selloff wiped out US$3.01 trillion i of the Dow’s value — the worst two-day paper loss in history, according to S&P Dow Jones Indices.
The dead-cat bounce (a temporary recovery in share prices after a substantial fall) that followed was impressive…
Jean-Claude Juncker, the President of the European Commission, said that all informal exit talks with Britain would be banned…until the nation triggered Article 50. That’s the specific piece of legislation that will kick-start the process.
Britain didn’t provide much assurance. In fact, it didn’t provide any. It said that it might not trigger Article 50 for several months. Hence, we got that glorious bounce.
Folks, it’s time to wake up — we’re now back to square one. Brexit is coming, and it’s real.
If stock markets did that last time, what about this time?
The Guardian reported yesterday:
‘MPs are due to start debating the bill in parliament on Tuesday. The legislation would give May the power to invoke article 50 and start two years of negotiations to leave the EU. The Commons will debate the bill for two days before a vote expected on Wednesday night. More detailed scrutiny involving proposed amendments to the legislation will begin next week.
‘The government announced on Monday that peers would debate the legislation after the February parliamentary recess, after it clears the House of Commons on either 8 or 9 of the month.
‘It will then be introduced for scrutiny by the Lords, where the government does not have a majority, on Monday 20 February, before completing its passage through the House of Lords probably on 7 March. If peers make any amendments, it would have to return to the House of Commons, where MPs would debate whether to keep the changes or get rid of them.’
I recommend noting those dates in your diary. The process should happen right alongside Trump’s policies getting delayed and the Fed eyeing higher rates.
Pondering the worst-case scenario for Brexit, even if the bill is passed between the lower and upper houses a few times, it will probably be finalised by the end of March. That’s Theresa May’s self-imposed deadline for triggering article 50.
It gets better…or is that worse?
Nicola Sturgeon, the leader of the Scottish National Party, gave Theresa May a two-month deadline to compromise over Brexit. Scotland wants to stay in the EU’s single market. And, if it doesn’t get what it wants, Scotland has suggested that it will call a second independence vote. That could happen before the end of March.
The mainstream’s probably going to run an ‘alarmist’ bandwagon campaign soon. Remember, similar to Trump’s election campaign, the mainstream painted a dire picture of Britain heading into the vote. It said the country would fall back into recession and costs hundreds of thousands of jobs.
As the turbulence shapes up across financial markets this month, expect to see more ‘alarmist’ headlines on Trump’s ‘reckless’ policies, the Fed turning bullish, Brexit, and Scotland. The combination will probably drive the market into meltdown.
The global stock market’s looking at a 10–15% correction into March. That includes the ASX 200. When it starts — and it may have already — don’t expect a major capitulation to the downside straight away. That won’t happen. Stock market corrections always start slowly, before nose-diving and causing a sea of panic.
This isn’t going to be a massive crash, though. So, if you’re looking for one, you better think again.
You should instead think of the coming correction as a major buying opportunity. Look to buy your favourite stocks near the low. If you back the best stocks — like these three under-the-radar companies in Resource Speculator — you could make a lot of money during the bounce that follows.
How will you know when we’re near the low? We’ll keep you updated here at Markets and Money. Or for more detailed analysis and actionable advice, go here.
Editor, Markets and Money