Fed Policy
Central Planning Makes A Comeback
Bulls who fashion themselves as contrarians argue that the public is nowhere near as infatuated with the stock market as they were in the late 1990s. It may come as a shock to our readers, but we agree with them.
Liquidity Overflow!
Based largely on the bearish trends in our monetary and liquidity measures, we were correctly negative on stocks throughout most of 2018. It’s therefore especially painful for us that 2019’s market rebound has been credited almost entirely to the “pivot” in most of those measures.
The Alternate Ending?
After last year’s spectacularly successful pivot following the December 2018 plunge, the thinking is that future rate hikes are the bull market’s only threat. Perhaps that will be the case; the belief is certainly well-supported by postwar U.S. economic history, but it also reveals a shocking lapse in short-term memory.
Waiting For The Stimulus To Trickle Down...
Last year the Federal Reserve dumped historic stimulus onto a full-employment economy and an already richly-valued stock market. The stock market obviously loved it.
Monetary Musings
Among six major monetary gauges, five are now graded bullish, compared with just three a few months ago, and zero at the end of 2018.
Making Money In The Money-Losers
Despite an economy operating “beyond” full employment for the past seven quarters, more than one-fourth of the companies in the Leuthold 3000 universe are losing money on a 12-month trailing basis. The Fed has subsidized what’s truly become irresponsible behavior.
The Fed Subsidy Is Wearing Off
Earnings results for the second quarter have so far "beaten" expectations (as they always seem to), but that hasn’t changed the calculus for Small Cap companies. About one-third of them have negative earnings over the last twelve months.
When A Cut Is Not Enough
The recent rate cut managed to bring policy uncertainty back into the market by two seemingly harmless words—”mid-cycle adjustment.”
Tariff Man Tampers With Toppy Market
Beware of those who write about stock market history, especially when they speak of cause and effect. The truth is that the “why” can never be known.
Signs Of Spring For Financials
Signs of spring are popping up everywhere in the Financials sector. S&P Financials was easily the top- performing sector in April and several sub-industries have been bubbling higher in our Group Selection discipline.
On The Cutting Edge—End Of Fed Hikes?
The Fed not only signaled no rate hike for the rest of 2019, but also committed to unwinding its balance-sheet reduction program, starting in May and ending in September. The market took it one step further and priced in a rate cut in the second half of 2019.
The Cycle Is Over If Confidence Fades Further
 .jpg?fit=fillmax&w=222&bg=FFFFFF)
The “Expectations” component of the Consumer Confidence survey has been wobbly in the last few months, but the latest report, released on Tuesday, showed the first meaningful hit to consumers’ “Present Situation” since the stock market first began to struggle 14 months ago (Chart 1).
Assessing The Cyclical Risks
With all the excitement over the Fed’s shift in rhetoric and the excellent subsequent market action, there’s a danger of losing sight of the broader cyclical backdrop for U.S. stocks. Remember, the economy is still operating beyond government estimates of its full-employment potential, and it’s not as if the Fed has actually eased policy—as it did successfully at a similar late-cycle juncture in the fall of 1998 and (ultimately unsuccessfully) in the summer of 2007.
It Wasn’t Powell Who Panicked
The Fed’s “Christmas capitulation” seems to get most of the credit for the stock market rebound, but we’re not exactly sure how, or even if, the Fed capitulated at all.
Did The Doves Swoop In And Save The Day?
Just a few months ago, Fed Chairman Jerome Powell boasted a reputation as a straight-talking, sound-money banker.
Odds Of Outperforming?
In September, the percentage of S&P 500 stocks outperforming the S&P 500 index fell to 40.7%, the lowest reading since mid-2012. Breadth has followed a conventional path over the course of this unconventional bull market; in the current phase, the odds of outperformance are steadily diminishing.
Beware The Policy “Narrative”
It’s been amusing to watch the narrative surrounding Fed policy evolve as the market has rallied.
The Chart The Fed Forgot
The Fed has long claimed itself to be “data dependent” while providing less and less information on those data points it considers most relevant. We can’t know what’s on that list, but we certainly know what isn’t: the ISM Manufacturing Composite, which (prior to the current cycle) provided an excellent gauge of the Fed’s policy bias.
Enjoying It While It Lasts
We don’t think the current stock market upleg is over.
Stock Market Observations
The S&P 500 has labored beneath its March 1st bull market high for the last two months while underlying breadth and leadership trends have remained mostly favorable.
Why The Treasury Department Should Watch The Tape
In recent years the Fed has been more forthright than ever about the importance of the wealth effect as a transmission mechanism of monetary policy. But this (or any) policy effect hardly exists in a vacuum, and the Fed would do well to recognize that stock market swings have played an increasingly important role in the country’s fiscal balance.
Policymakers’ Shell Game
We considered the launch of the QE tapering program in January 2014 as the formal onset of the Fed’s tightening campaign, and that view seemed to be on the mark when High Yield bonds, and then stocks, unraveled over the next couple of years—although the final losses in the DJIA and S&P 500 fell short of what we expected.
Rising Rates: Not Always A Death Knell
While the Dow Jones Bond Indicator has stood the test of time, history shows that rising bond yields are not always a bearish stock market phenomenon.
Putting “Our Spin” On The Positive Spin
Bull markets seem to create their own moods that lead to fundamental developments being viewed in a mostly favorable light.
Has The Fed Already Hit Stocks?
One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.
Goodbye ZIRP, Hello WIRP
Allow us to put forth yet another theory for this season’s plummet in NFL television ratings: Fed watching is back!
Rate Hike In Limbo—Positive For Risk Assets
Whether rates hike in September or December, we know the Fed will be very supportive of the market and the biggest beneficiaries will likely be EM and higher-yielding assets.
The Policy Conundrum
Over the last eight years, policymakers around the world have held interest rates at unimaginably low levels, run persistently large fiscal deficits, and (in some cases) engaged in outright money-printing via quantitative easing programs.
The Fed’s Capitulation To The Dovish Side— A Win-Win For EM & U.S.
We have mentioned a number of times that China had experienced a very unpleasant “second-hand” tightening due to its peg to the dollar. Its trade competitiveness has suffered tremendously. With a weaker dollar the Chinese Yuan can re-gain some of its competitiveness while maintaining its peg to the dollar. A rare win-win in today’s convoluted world of finance.
Big U.S. Banks: We Have A Motion, Is There A Second?
YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.
Was That All There Was To It?
As quantitative investors, the disciplines of the numbers trump stories—even our own. But we’re struck that the stories depicted by our Major Trend Index and other market tools over the past two years are entirely logical and sequential. Unfortunately these stories rhyme with those of past market cycles.
How Much Slack?
By now it’s consensus that the Fed missed the ideal window for the first rate hike (if one ever existed) by at least a year and a half. We don’t disagree…
Too Early To Dethrone Dividend Stocks?
In the context of a low growth/low inflation environment, with the Fed taking its time to guide rates upward, fixed income type of investments may pale by comparison to dividend paying stocks.
Fed Tightening: The Two-Year Anniversary?
We’ve long argued that this tightening cycle began in January 2014, the month of the first of seven tapering moves which occurred through October of that year. There’s both economic and market evidence to back up this claim.
Sentiment, The Economy & The Fed
We wrote in the January book that 2015 would serve up no shortage of excuses for the Fed to hold off on tightening all year. Whatever window the Fed may have had is now closed.
Fed Watching For The 21st Century
Deteriorating stock market breadth and worrisome leadership trends both suggest liquidity has already tightened; whether the Fed follows suit in September may now be just a formality.
Minding The Gaps
We think stock market action in the next few months will provide the Fed with an excuse to skip any rate increase in 2015. But our view is a minority one, and futures’ market odds on a September increase shot up in early August. Either way, the obsession over the timing of a Fed rate hike ignores the fact that world P/E ratios are already contracting—at least on the basis of our 5-Year Normalized EPS.
A Venerable Monetary Indicator Turned Negative
The smoothed, 26-week rate-of-change in the DJ Corporate Bond Index, a reliable indicator of monetary conditions over many different market and economic cycles, turned negative in mid-June.
Navigating The First Rate Hike
Our current view is the lift-off will be December or later. Assuming inflation will pick up and the Fed hikes the rate by the end of 2015, stocks will perform relatively well, with international stocks a better bet than U.S. stocks.
Don’t Fight The Fed?
While our stock market disciplines (including the Major Trend Index) are nominally bullish, we’re mentally gearing up to do something in the near future that was once considered ill-advised: Fighting the Fed.