STRATEGIST: Investors will get the big story of 2015 wrong because of two bad assumptions

Investors are increasingly convinced that the Fed will not raise rates this year.

But political strategist Greg Valliere at Potomac Research thinks these investors will be wrong for two big reasons.

In a note on Thursday, Valliere wrote that the two wrong-headed assumptions investors are making are:

  • Investors think the economy will stay mired in a mediocre growth path.
  • Investors think the Fed is too timid to risk a stock market temper tantrum.

On the economic outlook, this is something that strategists on Wall Street have begun banging the table on a bit more in recent weeks, despite disappointing economic data through the winter and a most recent jobs report that missed expectations.

Last week, we highlighted comments from BlackRock’s Rick Rieder who said the Fed has an “epic” window to raise rates, given the strength of the labour market. The big economic reports for the Fed’s outlook will be first quarter GDP and the employment cost index on April 30, as well as the April and May jobs reports.

In recent speeches, Fed chair Janet Yellen has indicated that the Fed will monitor developments in financial markets. But the point Valliere makes indicates that quips among some in the market that the Fed has a target for the S&P 500 or the 10-year bond, is just not the case.

Valliere adds: “We think the economy is lifting off, and we believe strongly that the Fed would like to get the first rate hike out of the way — probably in September, but June isn’t out of the question. No rate hike this year? We’re betting on at least two.”

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