• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / U.S. Equity

Don't Fear the Fed

Why I believe the central bank deserves benefit of the doubt.
By JIM CRAMER Feb 09, 2015 | 03:05 PM EST
Stocks quotes in this article: KSS, WMT, HD, DDS, CAT, HAS, MAT, MAS

Where the heck is it written that a better economy is bad for stocks? How did this become the perceived wisdom etched in stone, just unassailable in its logical imperative? It's in play every day, including today.

First, let's go over this gospel. We have had low interest rates for so long that many people, including commentators that come on TV all day, suggest that strength in the economy could be this bull market's undoing.

How do people arrive at this notion? On Friday we had a market that initially roared when we got terrific employment data, but then sold off as investors recognized that this hiring report was so strong that the Fed would have to move up its time frame for raising rates, regardless of previous statements. The economy's just too strong based on this number.

The flaw here? Over and over again the Fed has said it is data-dependent. The data include hiring but also include inflation, industrial production, wages and a host of other issues, not to mention worldwide progress in gaining growth. Remember, if the Fed said it was employment-dependent, it would be obvious that rates need to be raised right now. But the word data makes it clear that there's a plural here, and there are many reasons not to raise rates, including very little inflation and worldwide declines in the relative rate of growth, as in China or in the absolute rate, like in Latin America or Europe. This Fed is not brain dead. We have had many a Fed that would have raised rates multiple times already based just on employment, and I think that would have crushed growth and strangled the nascent economic rebirth post the Great Recession.

Think, however, about how smart this Fed has really been. When oil was at $110 and apparently moving higher in June 2014, Janet Yellen dismissed the climb of this commodity as well as others as "noisy." She became the butt of many a joke by the hardliners who thought that her view was too dovish.

Amazingly, when she called inflation noisy, it happened to be the absolute top in oil and so many other commodities. Do you ever hear her get any praise for that gutsy call? Can you imagine if she had raised rates because of the inflation that so many thought was inexorably going higher? What an amazing save.

Let's dig deeper. What if the Fed raises the Fed funds rate to three-quarters of a point rather than a quarter of a point because the economy is gaining strength. That might ripple all the way through all bonds and send mortgage rates up, and make business and construction loans cost more.

Let's just say that we have had plenty of economic expansions with rates at 3%, 4% or even 5%. If the Fed took rates up to those levels in a straight line, I think that could pose a real problem for the stock market. But it's highly unlikely to happen. I see gradual increases at best, stopping each time to be sure that growth isn't being stunted by the Fed.

So, I am discounting the possibility of a quick return to higher rates given how prudent this Fed has been. Call it the "benefit of the doubt" complex. The Fed deserves it.

Far more important, however, is this incredible fear of growth that has sprung up after years of low rates. There are portfolio managers and pundits who simply believe that any strength in this key labor indicator is the death knell of the bull.

Yet, the truth couldn't be more different. Here's why. Take the incredible run of the retailers. If you just pick a couple of random retailers, namely Kohl's (KSS), Home Depot (HD), Wal-Mart (WMT) and Dillard's (DDS), you know that these stocks have run. Why? Because of the prospects for a better economy. Remember how retail works. If the retailers think that their customers are confident, they will take in a lot of inventory, maybe expensive inventory, with big margins.

If they are right and the economy keeps expanding, they will make a lot of money, thereby justifying the big increases their stocks have taken. But if business turns down, the Fed raises rates and scares people and confidence erodes. The retailers will have to reduce the prices of what they bought in order to clear the goods. That will hurt profitability and the stocks will wilt. That huge cohort needs the economy to be strong to stay strong or get stronger.

Oh, and let's be clear that if the Fed were to raise rates to 0.75% or even 1% I don't think that would dent the sales if they continued at this pace.

Or just take today. Hasbro (HAS) and Masco (MAS) reported. The first represents totally discretionary spending and, unlike Mattel (MAT), it held up. Looks like Mattel's collapse was an execution issue; Hasbro did great.

How about Masco, the kitchen-and-bath supplier? Another terrific quarter based on American spending. That's not going to be killed by higher rates. If you are rooting for weakness to forestall the Fed, you could really hurt Masco.

The industrials are no different. I see Caterpillar (CAT) hanging in and going higher. That can happen -- that can be sustained -- but only if the U.S. does better because there isn't enough growth overseas to make Caterpillar's numbers. The classic industrial could be saved by the U.S. even if rates go higher. If the economy hiccups now (and it won't if rates creep up), then CAT tests its low again and maybe doesn't hold.

Oil needs a stronger economy to meet the supply or it will go below the $43 level and we will be back into default land. Right now the oil companies can raise money in the futures market. They can catch their breaths and make deals to save themselves. But if the economy weakens, oil will roll back over. Even as gasoline could go still lower, I like this level: The consumer still has more spare change, and the destruction of the high-yield market by the possibility of defaults in the 18% of the junk in the market that is oil is diminished.

We are in the sweet spot because of hoped-for demand.

Then there's the 17% of the stock market that's made up of the financials. They almost all need higher rates. They are the least of your worries.

So, as the market goes lower because of worries about an economy that's too strong, remember this: Stocks have rallied from Dow 1,000 when I started in this business to Dow 17,000 and change, and the majority of those points occurred when the economy expanded, not contracted, even if the Fed did have to raise rates.

Yep, I totally get the fear of the Fed. It's ingrained by all of the commentators. And as the day of reckoning for higher rates occurs, be ready -- but be ready to buy, not sell, because history says growth and progress are positives for the market, and these times will be no different.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

More from U.S. Equity

GameStop Earnings: Play the Game Tonight?

Bruce Kamich
Jun 7, 2023 2:09 PM EDT

Let's look at the charts of this former 'meme' stock ahead of the print.

Did You Miss the Rebound From Last Fall's Nadir? You Are Not Alone

Paul Price
Jun 7, 2023 1:30 PM EDT

This stock remains my single largest personal dollar holding. I averaged down multiple times over the past two years waiting for the moment we are seeing now. It's not too late to get onboard.

Remember When Netflix Couldn't Do Anything Right?

Bruce Kamich
Jun 7, 2023 11:38 AM EDT

The situation has changed -- fundamentally and technically.

I've Got My Eye On Ionis Pharmaceuticals for Higher Highs

Bruce Kamich
Jun 7, 2023 10:30 AM EDT

Here's how traders can play this biotech stock.

Yellow Flags Appear for the Market as VIX Hits a 3-Year Low

Guy Ortmann
Jun 7, 2023 10:11 AM EDT

Amid green lights on the charts, the market's data dashboard is starting to raise a few caution signs.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 07:19 PM EDT CHRIS VERSACE

    AAP Podcast: This Company Is Not Going 'Solo'

    Listen in as I talk with the very diversified Solo...
  • 01:51 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Adjusting Your Trading Approach to Shifting Market...
  • 06:54 PM EDT CHRIS VERSACE

    AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

    Listen in as the Action Alerts PLUS Podcast tackle...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login