There is so much talk about an impending 10% pullback. Many people are starting to say that we have seen the end-of-year rally, that it came early and will end shortly after the election. What could initiate a strong sell-off? Consider this scenario:
Some in the press are speculating that the fed will resume rate increases after the elections, perhaps as soon as December (no meeting scheduled in November). Typical of such articles is this one:
Beware: More Fed hikes may be coming
Inflation is still worrisome enough that more rate increases, not cuts, could follow the Fed's 'pause.'
By Chris Isidore, CNNMoney.com senior writer
October 20 2006: 6:22 AM EDT
http://money.cnn.com/2006/10/19/news/economy/inflation/index.htm?postversion=2006102006
This particular article is somewhat contradictory about timing. On the one hand, it points out that the Fed does not like to rock the boat right before an election, so this week the language would contain nothing alarming. On the other hand, it points out that the Fed likes to prepare the market with a series of warnings that increase in intensity. The writer speculates that this week's announcement might contain the first hints, perhaps words pointing out that the economy was not cooling off as much as previously thought.
But everyone on the street has seen articles like this and will be on edge. Any hint that this scenario is in the cards could trigger a sell off right now, before the elections. So if the Fed means to resume rate hikes, does it begin the process of signaling it this week or wait until December? Or call an unscheduled meeting in November?
Many will dismiss the possibility of a resumption in hikes. But what ultimately happens months from now is less important than what traders come to fear right now. The market could do a 10% sell off on rumors and fear alone and have it all over before the fed actually acts, if it ever does. Fed announcements are always nervous times. This week perhaps more than usual.
Some in the press are speculating that the fed will resume rate increases after the elections, perhaps as soon as December (no meeting scheduled in November). Typical of such articles is this one:
Beware: More Fed hikes may be coming
Inflation is still worrisome enough that more rate increases, not cuts, could follow the Fed's 'pause.'
By Chris Isidore, CNNMoney.com senior writer
October 20 2006: 6:22 AM EDT
http://money.cnn.com/2006/10/19/news/economy/inflation/index.htm?postversion=2006102006
This particular article is somewhat contradictory about timing. On the one hand, it points out that the Fed does not like to rock the boat right before an election, so this week the language would contain nothing alarming. On the other hand, it points out that the Fed likes to prepare the market with a series of warnings that increase in intensity. The writer speculates that this week's announcement might contain the first hints, perhaps words pointing out that the economy was not cooling off as much as previously thought.
But everyone on the street has seen articles like this and will be on edge. Any hint that this scenario is in the cards could trigger a sell off right now, before the elections. So if the Fed means to resume rate hikes, does it begin the process of signaling it this week or wait until December? Or call an unscheduled meeting in November?
Many will dismiss the possibility of a resumption in hikes. But what ultimately happens months from now is less important than what traders come to fear right now. The market could do a 10% sell off on rumors and fear alone and have it all over before the fed actually acts, if it ever does. Fed announcements are always nervous times. This week perhaps more than usual.
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