Steven Sheldon, founder of SMS Capital Management in Houston Texas sees the Fed's timing as crucial to current market conditions. "If we are in the midst of a mid-cycle slowdown, then this should prove to be a great time to buy stocks. Stock multiples should expand as economic growth resumes and the expectation of rising corporate profits takes hold once again. The Fed cutting interest rates should help this process along," explains Sheldon.
Without a doubt, the Fed will be second-guessed whatever course of action they pursue. Sheldon believes that perhaps the best course would be for the Fed to reduce the fed funds rate by 25 basis points. "Anything greater than this amount," he explains, "might be premature at this point and undermine the Fed's effort at fighting off inflation. If they stick to 25 basis points, they'll have taken action, acknowledging that the risks to economic expansion have grown. Any appearance of avoiding the issue of the slowdown will likely create more volatility and instability in both the stock and credit markets."
Despite the weakness in the housing market, "The Fed will likely see the global expansion as remaining intact. This helps multinational corporations that sell abroad, but doesn't really do much for local consumers that can't sell their homes," explains Sheldon. "Either way, we'll find out soon enough what direction the Fed plans to take."
