Here’s a tip on how to profit from the markets’ obsession with the Fed’s meeting this week. Just wait 30 minutes after the Fed’s interest-rate announcement — scheduled for Wednesday at 2 p.m. Eastern — and bet that the stock market will reverse however it reacted in those first 30 minutes.
The reason this is a bet worth considering: Regardless of what the Fed’s interest-rate setting committee does or says this week, we know that it will have virtually no real-world consequence. So the markets’ initial response will be a knee-jerk reaction based on hype rather than facts, and almost certainly will get corrected.
Let me hasten to add that I am not saying that interest rates don’t matter. They of course do. But if you accept that the Fed will be raising rates sooner or later anyway, the question we then should be asking is whether it makes any significant difference whether rates are raised three or six months sooner or later than previously expected. And the answer is no.
I invite those of you who don’t believe me to calculate the discounted value of any financial series over coming years, be they stock prices, dividends, corporate earnings, and so on, assuming different interest rates. You’ll find that a several-month acceleration or delay in the timing of a quarter-point rate increase makes hardly any difference to its present value.
Source: Bloomberg Pro Terminal
Trader Bozhidar Arabadzhiev
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