Weekend Reading: Fed Stampedes The Bulls

What a difference a day can make? Last week the world was consumed with fears of a slowing economy, weak demand and volatile markets. But that was “so last week.” 

As I penned this past Tuesday:

“In a more normal market, I would already be well convinced that the bullish trend had ended, particularly against the backdrop of an earnings recession and weak economic data. But this is by no means a normal market given the ongoing interventions by the Federal Reserve to support asset prices.

It is worth noting that contractions/expansions in the Fed’s balance sheet have a very high correlation with subsequent market action as liquidity is pushed into the financial system. As shown in the chart below, the Federal Reserve has already once again began to quietly expand their balance sheet following the recent downturn. Not surprisingly, the market has responded in kind with the recent push higher. My suspicion is that if such minor interventions fail to stabilize the market, a more aggressive posture could be taken.”

“Tomorrow, the Fed will announce their latest FOMC rate policy decision. My expectation is that they will once again forgo hiking rates with few changes to their verbiage of their decision. However, any indications that recent economic weakness will push rate hikes further into the future will likely be cheered by the “bulls” pushing the index back towards recent highs.”

That is precisely what happened. Despite continued weak economic data, stocks soared toward market highs as the promise was made that “rates would be lifted in December.” 

The interesting part of this is that “tighter” monetary policy is not good for equities longer term. Furthermore, with economic growth at 2%, there is very little margin of error for the Fed with respect to monetary policy mistakes.

However, those are just my thoughts.