Bespoke Investment Group is in a class of its own when it comes to finding trends in financial data. Below is just one gem from last Friday’s weekly 30 page report for subscribers (sign up: free trial).
The key takeaway from this week’s data [Jan 28 - Feb 1] is that while growth is still on the positive side, the level of growth remains far from levels where the Fed is going to even consider taking its foot off the gas. Last month we compared the current period to the mid 1990s “Goldilocks” economy where growth was moderate and inflation was low. Unlike that period, the current environment has seen subpar but we’ve gotten stable economic growth and an extremely accommodative Fed.
We called this period of slow growth and an accommodative Fed an “Obamalocks” economy. Although the economy may not be doing great during this period, the stock market has been soaring. The chart below compares the performance of the S&P 500 to the balance of Treasuries and Mortgage Backed Securities on the balance sheet of the Federal Reserve. As shown, the two have practically moved in lock step with each other. When the Fed starts buying and increasing its holdings, the S&P 500 has rallied. More importantly, though, is that each time the Fed took its foot off the gas, the S&P 500 ran into trouble. Keep in mind, these weren’t even periods where the Fed starting applying the brakes or even conveyed that they were considering doing so. Imagine what could happen if the Fed actually contemplated applying the brakes?
Based on this week’s data, the prospect of the Fed even taking its foot off the gas is extremely unlikely. The key for investors will be to correctly anticipate when the Fed will change course. There are many examples of the market running into turbulence after the Fed removes an accommodative policy that has been in place for awhile, and the current period of accommodation is unprecedented.
This one doesn’t bode well for the Fed unwinding and its impact on rates and nascent economic/housing recoveries. Or will the Fed just hold all their QE assets to maturity? If so, will they be able to meet their obligations? Questions, questions… Bespoke has answers.
$SPY, $TLT, $TBT $TNX, $ZN_F