Waiting for the Fed has been one of the longest running plays on Wall Street. An exercise in ambiguity as well as patience, the show will continue at least until mid-December, when Janet Yellen makes her dramatic, perhaps climactic, monologue on if and when interest rates should rise.
China, however, remains the biggest potential showstopper. If the markets lose faith in the Chinese government's ability to control effectively the People's Bank of China and the economy, it could have deep and far-reaching consequences.
Indeed, according to a recent Barclays survey, 36% of its clients fear a China collapse over the next 12 months, versus 7% who worry about the Fed raising rates.
Keep it mind it was China's surprise devaluation of the yuan in August that sent many stock markets around the world falling 10% or more. Most markets, including the U.S. averages, have since recovered most of their losses.
The consensus among economists continues to be that China will have what is for its economy a soft landing; most analysts are predicting GDP growth there of about 6.6% next year.
Should that number drop substantially and rapidly, however, to, say, below 5%, a currency war, civil unrest in China, a crash in emerging markets or all three at once could spark contagion into the developed world, likely starting with the commodity-focused economies, such as Australia and Canada, which have already been affected by China's softness. That's not our base case; it's a Black Swan.
Strong U.S. data over the next few weeks that presages a rate lift-off could also stun the market. After all, quantitative easing and this extended period of near-zero interest rates have been an experiment, and like most experiments, risk is involved; no one knows what will be the outcome as the Fed moves to normalize rates.
But any hit to the broader market should be shallow and temporary; stocks are unlikely to crater, although a rate hike would likely lead to a stronger dollar, which could hurt export-driven multinationals.
The chances of a quarter-point rate increase in December are a flip-of-a-coin. Moreover, into next year, after the initial shock, a December rate hike should have a muted and possibly positive market reaction, particularly if paired with language that the Fed intends to move very slowly.
A move off zero rates should be viewed as indicative of an economy on the upswing and recession fears allayed. GDP should grow by 2% to 2.5% in 2016.
Shorter-term, the picture is far from glum, too. Expect holiday season sales this quarter to increase 3% to 4% over last year; brick-and-mortar sales will continue to be soft.
Oil? It's in a range where the benefits to consumers should outweigh the damage in the oil patch. We're not calling a bottom yet, but a move toward $60 to $80 a barrel just might be a sweet spot for the economy.
Bubbles? This is not 1999. Sure, there may be some ebullience in Silicon Valley, especially with the recent spate of pre-IPO unicorns. And overall the market is not cheap; it's fairly valued. But the exuberance is mostly limited to a select group of highflyers (Tesla and Netflix come to mind) not the market as a whole.
Growth-oriented investors should stay the course and maintain a long-term exposure to equities, regardless of short-term market tremors. The market rewards discipline. Trying to time the market is a fool's game; it's emotionally driven and that leads people to make lousy decisions.
Likewise, investors looking for income should continue to favor strong dividend-paying stocks, short-to-intermediate bonds and master limited-partnerships.
And, remember, even if the Fed raises rates in December, the theater won't end; there will be encores. Expect Yellen and her cast will likely continue their soliloquies into 2016, and audiences -- much like Samuel Beckett's tramps wondering when Godot will arrive -- will continue to ponder whether the Board of Governors will keep raising rates, how fast and how far.
China, however, will be the better play to watch.