The Fed to the Rescue?

With the markets in full correction mode it will be interesting to see what the Federal Reserve does going forward.  I would doubt that there will be an interest rate hike in March as it is should now be clear to the Federal Reserve that the market is completely reliant on their support and without it a bear market will begin.  As we wait for their decision market participants like to point at something as a cause for their woes and present it is China and the price of crude oil that are being blamed but the problems run far deeper than that.

Certainly the low price of crude oil is playing havoc in the economies of those reliant on crude oil exports but outside of that it is a win for companies like Ford who will sell more large trucks (the bedrock of their profits), airlines and commuters around the globe who are feeling some relief at the pump.  Outside of these headlines is the high yield (or junk) bond market which is reeling as many loans were to the fraking industry which is highly over leveraged.  No doubt there will be numerous defaults and bankruptcies to come from this industry but that alone is not enough to undermine the market to this extent, particularly as crude prices have been low for over a year.

China's problems are of a larger concern because they have become an economic power and a major part of the global growth story.  With their growth dropping precipitously and with a lot of their growth reliant on poorly performing state run businesses it is clear that their growth will languish well below 7% for the foreseeable future and this will cause a significant drag on global growth.  The results of this fallout are being felt throughout the developed world as companies like Apple are discovering that without meteoric growth in China sales growth is hard to come by.  For this reason the S&P 500 companies will earn more than 20% less than what they earned in 2014 and combined with a market that has stretched to one of the highest price to earnings ratios in history, the result should logically be a bear market.

The questions that should really be asked are, 1) will the Federal Reserve reverse course and come to the market's rescue and, 2) will a bear market cause a recession in the United States?  To answer the first question one need look no further than the actions of the Federal Reserve since the Greenspan era.  Yes they will come to the aid of the markets but the question is will the markets react to the stimulus with enthusiasm or despair?  If one thinks about it rationally despair should be the answer but stock investors will look past the "Hail Mary" pass from the Federal Reserve and will more than likely rally the market. Should the Federal Reserve do this then, as I have repeatedly explained throughout the years of this blog, the future fallout will be even worse than it would be if they left things alone.  How many more times do we have to witness this folly?  But, amazingly they continue to believe in their methods and have even managed to convince the rest of the world's central bankers to follow suite.  Next time around though they will have to double down so it is likely that we are looking at $10 trillion more of wasted money rather than the trifling $5 trillion that has been spent to date and this should create a much larger problem!  Well done them!

The main issue to me though is will we enter a recession in 2016?  As a small business owner it finally felt in 2015 that the whole "trickle down" theory had finally started to reach the man on the street.  There was more money being spent on consumer items and profits started to appear.  For the first time since 2009 the small business owner was making headway!  A recession would undercut this grass shoot recovery and that would be a real tragedy as the middle class rely on small businesses for their survival.  Already the Great Recession has created a massive imbalance in the structure of United States society by wiping a large swath of the middle class away.  Should this class continue to contract the economic repercussions would be deeply felt and would create a massive disturbance in the force (I couldn't help myself)!  The force that I refer to is the United States economy which would take years if not decades to recover if the middle class contracts much further.  Furthermore, with large businesses feeling the effects of a global slow down it is imperative that small business pick up the slack; they are more insulated from global market shifts, they are the job engine of the United States and the middle class's last bastion of hope.  A recession would undermine this and would result in a true economic disaster.

Unfortunately, unless the selloff in the stock market is quick and sharp the effects of this will feed into the public's outlook and consumer sentiment will crater.  With it wallets will close and the first to feel the impact will be the small business owner.  My hope (and as all readers of this blog will know hope is the worst of all four letter words) is that we have a 30% to 40% market sell off in a swift three to six month period followed by a steady recovery based on proper fundamentals but the chances of that happening are slim to none, but we can always hope!