The Federal Reserve is in a tough spot and faced with a big conundrum: the economy is not responding well (GDP most likely contracted last quarter) to their historic easy money policies. Since 2008, the Fed has held rates at zero and has pumped more money into the system (QE1, QE2, & QE 3), than any other Central Bank in history! Even with all that, GDP remains anemic at best and was most likely negative last quarter…That, in a nutshell, is their biggest problem.
The good news is that the stock market is responding exceptionally well to their easy money policies and the U.S. economy is the largest its ever been in history, approaching $18 trillion (although barely growing).
Over the last few years, other central banks have jumped on to the Easy Money bandwagon and we saw the QE trade “evolve” (to borrow a term coined by Mohamed El-Arian when QE 3 ended in October 2014). Now every major central bank in the world has adopted some sort of “easy money ” stance and the U.S. Fed still has rates pegged at zero. The Fed remains “Data-Dependent” and has told us they don’t plan on raising rates until the data improves. So far, the data is not improving.
The problem Dr. Yellen and company face now is that the economy is NOT growing even with rates at zero. Imagine what will happen if they raise rates? Will we fall into another recession? Will corporate earnings get crushed? Will deflation surge? etc..etc. The latest round of economic data continues to disappoint which suggests to us that the Fed is not in a rush to raise rates anytime soon. Eventually, that will change but until the “data” improves, we have to expect this sideways to sloppy action to continue on Wall Street.
What concerns us even more is the outright awful action we are seeing in the transports since November 2014 which should serve as a proxy for the economy. Remember, the transports benefit from “stuff” moving throughout he economy and the fact that they are getting trashed bodes poorly for both Main St and Wall St.
Another disconcerting event that emerges on our radar is the sloppy action in other capital markets, mainly global Currencies & Commodities. It is not normal to see major global currency and commodity markets trading all over the map and some trading like penny stocks. Over the past year alone, crude oil plunged 60% in 10 months and then surged nearly 50% in 2 months. That is not “normal” action for a major global commodity like crude oil and if we polled a large group of investors and told them an asset fell 60% in a few months then surged 50% almost all of them would probably say it is a penny stock, not a major global commodity.
All this sloppy action in the macro arena typically bodes poorly for stocks. But so far, the equity market continues to shrug off any and all bearish news and instead continues to focus on the easy money from the Fed and other central banks. Eventually, the music will end (the market will stop reacting so well to the easy money sloshing around the globe) and this aging bull market will end. Until then, by definition, we are still in a very strong bull market and pullbacks should be bought until more damage emerges.
For the past few years, all pullbacks have been shallow in both size (small % decline) and scope (short in duration) which illustrates how strong this bull market is. Additionally, I cannot recall at a time when a bull market in equities ended with rates at zero. We would be remiss not to note that the benchmark S&P 500 has not seen a -10% correction since June 2012 which is a very long time. Which means we are getting closer to a 10% correction, not further away. We remain bullish but want to be prepared when (not if) the market pulls back. Until then, we expect the market to continue to move higher from here.
Blog post by Adam Sarhan, FindLeadingStocks.com