Ready, Hike! (but Fed Won’t Raise Rates Too Soon)—Searching for Alpha for February 2015

By Ben Warwick

Commentary February 03, 2015 at 08:00 AM

Share & Print

Back in November, I posted a series of blogs detailing three trading ideas for the end of Quantitative Easing. Since then, I've been asked about where to invest once the Fed decides to finally raise rates.

First off, I don't think a rate hike is likely until late 2015 at the earliest. Europe is just now starting a round of QE in an effort to avoid deflation and promote economic growth. If the Fed hikes, interest rate differentials would cause a further rally in the greenback. That would hurt multinational companies, and potentially cause a reduction in job creation.

No one wants that.

The Fed manipulates interest rates in order to control inflation. With commodity prices in a prolonged downtrend, there is little reason to act any time soon.

But, inevitably, rates will rise in the U.S. Since bond prices move lower as rates go higher, a hike will likely make equities even more attractive compared to debt. I am still focused on domestic equities, especially those that get most of their revenue inside the U.S. (thereby avoiding currency losses due to the higher dollar). If at some point Europe gets a bit more frothy, their bourses may get interesting.

I expect the market to react to higher rates the same way that it acted when crude prices dropped so dramatically – with equal parts confusion and fear. After the dust settles, it's likely we'll see money flow from debt to equity. And along the way a tradable dip may allow us to put some cash to work – a welcome sight after so many V-bottoms in 2014.