Fed Policy

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.

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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.

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Poor performance in 2014 by two typical victims of Fed tightening—Consumer Discretionary and Small Caps—corroborated our argument that “tapering” is tightening.

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While the collapse of Swiss government bond yields into negative territory was January’s bond market stunner, our “G7” composite 10-year government bond yield reached its own milestone when it closed the month below 1.0% for the first time in post-WWII history.

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Considering the Major Trend improvement, new bull market highs (Nov. 6th) on the S&P 500, DJIA, and DJ Transports, we present a list of talking points we’d use if forced to make a bullish stock market case.

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The sell-off in risky assets in early October promptly led to expectations of a more dovish Fed.

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The recent strength in the dollar coincided with a spike in volatility and weakness in risky assets, but the relationship over the last couple years has been tenuous at best.

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Five springs ago, we couldn’t have imagined we’d still hold near-maximum equity exposure after a near-tripling in the stock market from its Great Recession low. Then again, we wouldn’t have guessed that Fed printing presses would still be whirring so many years after the crisis ended. Coincidence? Probably not.

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We expect the 245-250 barrier to be tested, and if it is decisively broken, much lower yields could be in the cards.

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The new debate over the QE “taper” erupted at the same time that a long-reliable Fed-tracking tool is telling us it’s time to ease.

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Inflation is still below the Fed’s target and near term pressure is only moderate. This gives the Fed some room to ease further if the economy falters.

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Five groups we think are poised to benefit form the stimulus legislation.

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Fed policy in the current crisis has been far more aggressive than at a comparable point in either the Great Depression or in Japan’s “Lost Decade.”

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Improving cyclical leadership could be signaling that the bear market is in its final stages. In 10 of the 12 past bear markets, cyclical stocks turned up prior to the conclusion of the bear.

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The statistical tendencies of seasonal patterns just haven’t proved persistent (or logical) enough for us to build them into our Major Trend Index. Can it be a bear market if the major indices do not decline more than 20%? Putting a nail in the coffin of the decoupling theorists.

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There is political pressure to keep inflation low, minimizing COLA (cost of living adjustments) and Social Security costs. Low inflation also helps to keep interest rates down, which keeps government interest payments as low as possible.

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The U.S. economy is slowing and probably fell into recession in Q4 2007

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At the risk of beating the “we’re in a recession” theme into the ground, we thought some analysis of the hot-off-the-presses March employment data would be worthwhile.

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Market has so far performed pretty much as expected. Major Trend still Negative, but recent improvement is surprising. Bear market could be winding down.

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What follows are my personal observations and opinions. I am an anti-inflation fiscal conservative and I know some would add “curmudgeon” to this description.

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