ROSENBERG: Something changed in the market and it's significant
Economists believe that the the first rate hike since June 2006 could happen some time between September and early next year.
But those expectations keep getting pushed back, especially amid rising market volatility and falling inflation expectations.
All of this confusion is creating a problem for the Fed in that the markets seem to be losing faith in the Fed's ability to keep markets propped up. Gerard Minack wrote about this on Monday:
There is also a risk that we continue to see investors lose faith in the ability of policy makers to achieve their aims. By my reckoning, most investors already have little faith in the political leadership of many developed economies. But there has been a deep faith in the ability of monetary policy to both lift asset prices and, ultimately, generate an adequate inflation rate over the medium term. If investors start to doubt that - and the decline in break-even inflation rates suggests concern (Exhibit 8) - then things could get significantly worse. This is not my base case now. It is my base case for the next downturn, which will be the apotheosis of the disinflationary trends apparent for two decades, and likely to result in a profound bear market.
Gluskin Sheff's David Rosenberg agrees with Minack that all of this is worth keeping an eye from. He mentioned it in his discussion of the recent market action in a note on Tuesday:
What has changed, however, is significant.
The bull market is not over even if the unusual characteristic that was the powerful driver for price-to-earnings expansion is probably over, namely the power of zero rates and central bank/government ability to distort or manipulate the markets.
We are seeing in real-time that there is a limit to how far valuations can go via ultra-low rates and intervention alone.
As my friend Gerard Minack has pointed out, this all points to greater volatility, lower returns than in the past,and most importantly, as we have seen already, a greater dispersion of performance - as the multiple-driven beta for the markets now morphs into the more "idiosyncratic" impact of corporate earnings.
The old multiple "beta"-driven market suits a "passive" investment style whereas the new environment we will be confronting even after the dust settles is an earnings-driven market which means stock selection and "active" investment management will be paramount.