Fear the Fed? Wells Fargo Strategist Cites Three Reasons Not To

  • Household debt, labor market, S&P 500 P/E seen as favorable
  • `All the hand-wringing may be much ado about nothing'

Stock investors can afford to be sanguine even if the Federal Reserve’s policy makers raise their target interest rate tomorrow for the first time since June 2006, according to Gina Martin Adams, a strategist at Wells Fargo Securities LLC.

The chart below highlights “three reasons not to fear the Fed” that Martin Adams presented in a Sept. 14 report. They cover household debt, the labor market and equity valuation, as compiled by the Fed, the Labor Department and Bloomberg, respectively. The chart shows where each of the indicators stood when the central bank began raising rates in the past.

“Recent volatility suggests equity investors seem nervous about a potential policy mistake,” Martin Adams wrote, referring to swings in stocks. “All of the hand-wringing may be much ado about nothing.”

Household debt is represented by the financial obligations ratio, which tracks mortgages and consumer-debt payments as a percentage of disposable income on a quarterly basis. The indicator dropped to 15.3 percent in this year’s first quarter, the most recent figure available, from the previous decade’s peak of 18.1 percent in the fourth quarter of 2007.

To represent the labor market, the New York-based strategist cited the pool of available workers as a percentage of the number of people with jobs. The pool consists of the unemployed and those not counted in the labor force who would like employment. This ratio dropped to 8.9 percent in August from its December 2009 high of 13.9 percent.

Martin Adams used the Standard & Poor’s 500 Index’s price-earnings ratio, which stood at 17.5 as of yesterday, to gauge stock valuation. Stocks were expensive most of the time by this yardstick when the Fed began increasing rates since 1980, she wrote.