What's The Most Likely Timeframe For Rate Hikes? (Part 5 of 5)
The bottom line: Thanks to a slowly improving labor market, anemic wage growth and a still reluctant consumer, economic growth is likely to be modest and inflation low. As such, while it’s still possible that the Fed will announce tapering of its bond purchases this month, early 2014 seems the more likely time frame.
Market Realist – Weak consumer spending could affect GDP growth
The graph above shows consumer spending in the US since 1Q12. Although spending has been increasing, it is not increasing fast enough. From 1Q14 to 3Q14, consumption increased by only 5.3%, which is a meager 1.9% if compounded annually.
As mentioned earlier, consumption makes up ~70% of the US GDP. If consumer spending remains tepid for longer, it may hurt the GDP growth. The Fed will want consumption to pick up before it raises interest rates.
However, with oil (USO) prices falling, this might change. The dip in oil prices acts as a tax cut for consumers. It increases the disposable income, as oil is a necessity. A cut in the fuel bill is good news for every household. However, it remains to be seen whether this sparks an increase in consumption.
On a separate note, watch out for small caps (IWM), which usually outperform large caps (OEF) when interest rates are low. However, small caps saw massive multiple expansion in 2013, and are trading at hefty valuations of ~21x times earnings. Cyclical sectors, particularly the financials (XLF)(KRE), appear attractive at the moment.
Please read Market Realist’s An Improving Economy, But Lower Rates. Why The Disconnect? for the continuation of this theme.
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