The Fed Fumbles

I’m doubting more and more that the Federal Reserve knows what it’s doing. The central bank had to abruptly reverse course on a planned rate increase in June after the May jobs report came out Friday. It showed a measly 38,000 jobs were added, the lowest monthly jobs gain since 2010.  

Given that report, investors should expect rates to be lower for longer.  It’s clear now that continued economic weakness around the world will stall the Fed’s plan to return us to normal interest rate levels.  Fed Chair Janet Yellen, in a recent speech, was notably fuzzy on when the next rate increase will happen; that should give investors pause. 

On the other hand, it reinforces our Global Income Edge strategy. If you want good dividend income you should invest in global companies to guard against slowdowns in particular countries, and also to guard against the Fed making the wrong call on interest rates and pushing the U.S. into a recession.

The central bank backtracking on rate hikes for a second time this year does not inspire confidence. And neither does the Fed seeming to ignore the decline in corporate earnings.

Martin Wolf, economist at the Financial Times, described the present situation to me as a “contained depression” where the containment “was not working out so well.” I starting to think he’s right.

The World Bank this week downgraded its 2016 global growth forecast to 2.4% from the 2.9% pace projected in January. The move is due to sluggish growth in advanced economies, stubbornly low commodity prices and weak global trade.

Add to that my belief that the Federal Reserve is focusing on the wrong data. While consumer spending, hiring and wages have improved, the saving rate has declined, corporate earnings and investment have dropped, and some forecasts are starting to predict subpar U.S. GDP growth of less than 2% for the year. Those point to continued economic stagnation.

Until I see meaningful increases in corporate investment, higher earnings and sustained increases in consumer spending and hiring, my best advice to investors is to remain in global safe haven, income investments.  

P.S. I am the chief investment strategist for Investing Daily’s Global Income Edge, and analyst for Utility Forecaster. For Global Income Edge we take a worldwide view of income stocks that combine the stability of developed countries with the growth of developing countries. Our goal is to recommend high-yielding, relatively safe stocks (including REITs) that provide superior yields to U.S. stocks alone. Feel free to use the Stock Talk feature beneath this article if you have any questions about it.