Sherpa Investment Management Blog: The Link between the Fed and Y2K

September 17, 2015

Fear of the Unknown

 By: James Mantosh 

As the turn of the millennium approached people began to realize that computers around the world only counted the last two digits of a number for any given year (computers used xx99 for the year 1999, for example). This meant that computers didn’t know the difference between the year 1900 and the year 2000. People thought that computers everywhere would reset on 01/01/2000 and mass chaos would ensue. And because of our heavy dependency on computers for everything, we panicked. This event obviously did not happen and it was business as usual on January 1st 2000. But it’s not worth remembering that nothing really happened as the clock struck midnight on December 31st 1999, but what is worth remembering is the widespread panic (and ridiculous doomsday stories that people told) in the days leading up to the year 2000 (if you were to ask ten different people what they thought would happen when the year 2000 rolled around, you would get ten different answers). So, the real fear was a fear of the unknown, a fear of what was on the “other side”.

If we fast forward to 2015 we can see a similar trend in financial markets. For a while now the Federal Reserve has been saying that it will raise the fed funds rate (an action it hasn’t taken since 2006) and because markets have become accustomed to a low interest rate environment investors are reacting by panicking; not because they know what will happen when rates rise, but because they don’t.

Will a rate hike result in mass chaos? Personally, I don’t believe so. Can we expect some volatility? Sure. But will markets crash if the Fed raises rates by .25%? Probably not. The Fed has threatened to raise interest rates too many times and because of this we feel that any action decided by the Fed in their September 17th meeting will have already been priced into market expectations. Further, and contrary to popular belief, we at Syverson Strege and Company | Sherpa Investment Management feel that to reduce speculation and volatility in financial markets worldwide, the Fed needs to get an initial rate hike out of the way. Once this happens we feel that markets will be less volatile as investors will finally be able to shed their fear of the unknown and plan accordingly.

 

Disclosure:

Some of the views expressed in this article are those of David Zervos of Jeffries, LLC, speaker at the CFA Society of Iowa’s September monthly luncheon.