Gary Dorsch: Fed to Launch Surprise Rate Hike This June

The Fed is becoming more concerned about equity market valuations, as Janet Yellen recently told Lagarde at the IMF, which could lead to sooner, though even smaller-than-anticipated, rate hikes starting this June, said Gary Dorsch of the Global Money Trends newsletter in a recent interview with Financial Sense Newshour.

“I think the Fed will start raising the funds rate…earlier than most people believe; but I think the Fed will go in one-eighth point increments, not in quarter point increments.

So they will move one-eighth of a point in June—that’ll be the first baby step; then they will go another one-eighth in September and another one-eighth in December and get you up to five-eighths of a percent by the end of the year.

That at least will top off the stock market, prevent it from going higher and it won’t really be enough to cause much of a sharp selloff…

This is a liquidity-driven rally… There’s also massive buybacks by US corporations that are propping up this market.

The S&P 500 companies are expected to return one trillion dollars of their profits, nearly all their profits, to shareholders in the form of dividends and buybacks. That’s a very powerful QE in itself—a corporate QE. So that limits the downside...

But the number one nemesis for the stock market is the Federal Reserve. If the Fed starts to drain liquidity…that could be the catalyst for a decline…

The Chinese market is a classic example of a liquidity-driven rally which is not based on any bullish fundamentals.

To have a market double in value in just about eight months even as we’re seeing reports that the profitability of Chinese companies are actually negative five percent compared to a year ago on average goes to show you that it’s all about liquidity and understanding the psychology at the moment of the market…

Now after a 100% move up…I would anticipate the possibility of a five or ten percent pullback and traders will move in and buy the dip and try to make new highs in the Chinese market. It’s possible that the Shanghai Index which got to 6000 back in 2007 may try to aim for that one more time…but I wouldn’t be surprised to see a five or ten percent drop short-term before the rally resumes.”

Listen to the rest of this interview with esteemed market technician Gary Dorsch on the Newshour page here or on iTunes here. Subscribe to our weekly premium podcast by clicking here.

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