In the waning weeks of summer, investors began to think about those pesky DOTs yet again. Not coincidentally, as the potential for one or more Fed rate hikes this year seems more likely, some traders have begun to curb their enthusiasm for bidding share prices even higher. Indeed, renewed concerns about the DOTs and what they may portend for the path to interest rate normalization may well be what ultimately derails this raging bull. The imminent Fed meeting update could be an important turning point.
The most recent FOMC SEP projections were released back in June. But just a week later, those projections were quickly blown out the window when Brits defied the experts and voted to leave the European Union. Markets around the world plunged immediately following the Brexit news shock. Inspired in part by reassuring comments from Fed officials, however, traders quickly assumed the Fed would be lowering the DOTs come September in response to the Brexit uncertainty and commentary from some Fed officials seemed to support that notion. Further rate hikes in 2016 for a while seemed to be completely off the table, underpinning the summer rally. Within days the markets righted themselves and, in some cases, even eked out new all-time highs.
The expected further postponement of Fed rate hikes overshadowed continued confusion about the orderliness of Brexit, its possible negative effect on the British economy, the rest of Europe, and eventually the rest of the world. Now, as the release of the next set of DOTs approaches, stocks, after meandering sideways for most of August, have experienced a sharp pickup in volatility, and several steep daily drops. But the cumulative decline from the mid-August highs, so far, is de minimus, amounting to just half that of the post-Brexit dip. The release of the new SEP on September 21st, however, could trigger a much greater correction . . .