• 288 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 290 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 690 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 700 days Big Tech Disappoints Investors on Earnings Calls
  • 701 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 703 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 707 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 708 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 710 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Trade In Counterfeit Goods Hits Half A Trillion Dollars

Trade In Counterfeit Goods Hits Half A Trillion Dollars

The counterfeit market has breached…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

  1. Home
  2. Markets
  3. Other

Evidence Said Be Bullish Before Fed - Still Does

Smilin' ben bernanke

Fed Does Unexpected, But Was It Really A Surprise?

Below is Bloomberg's summary of Wednesday's highly anticipated Fed policy statement:

Ben S. Bernanke reinforced his standing as the most activist Federal Reserve chairman in history by doing the unexpected: nothing.

Wednesday before the markets opened and several hours before the Fed dropped the "no-taper" bomb on the investing public, we penned the following:

The bulls remain in control, which means something has to change for the bears.

What prompted us to write that even when our base case called for a $10B Fed taper? We will answer that question below using one of many examples of observable evidence that was in place before the Fed statement was released.


Bond Market Battle

Yields versus Defaults

Our market model uses numerous risk-on vs. risk-off ratios to monitor the market's risk tolerance. Markets are the mechanism that sets asset prices. It is prudent to monitor the mechanism that determines the value of your investment portfolio. The bond market (a.k.a. credit market) tends to focus on two major issues:

  1. How much does this bond pay?
  2. What are the odds of default?

When the market determines default probabilities, it includes assessment of the economy. If the odds of a recession are low, then the odds of widespread bond defaults are also low. Conversely, if the odds of a recession are high, the odds of bond defaults also begin to increase. If you believe the odds of widespread bond defaults are low, then you would prefer to own a bond that pays a higher yield. If you believe the odds of bond defaults are rising, then you would prefer to own a higher-rated and more conservative bond. We can monitor the battle between yield and defaults by tracking the performance of higher-yielding junk bonds (JNK) relative to more-conservative Treasuries (TLT).


Credit Markets: Bullish On Economy

What was the bond market saying about the economy and default risks before the Fed meeting? The aggregate opinion of bond market investors was pointing to bullish outcomes for both the economy and financial markets.

JNK:TLT Weekly Chart


Pro-Stimulus Yellen Also Sides With Bulls

Sun Setting on Summers

We all know what happens in a two horse race when one of the horses drops out. With Larry Summers now in the yesterday's news category, Janet Yellen is sitting in the catbird seat. While it is hard to believe anyone could be more pro-stimulus or pro-intervention than Ben Bernanke, Janet Yellen may be just that. From Bloomberg:

Yellen fought for more than a decade to put combating joblessness on equal ground with controlling inflation at the core of Fed policy. Now, her confidence in government's ability to smooth over the ruts of market economies has become the prevailing view at the Fed under Bernanke, the most activist U.S. central bank chief in its 100-year history.


Investment Implications - We Are Data Dependent

The Tone Was Risk On Before The Fed Statement

The owner of the Boston Red Sox, John Henry, made his fortune in the money management business using a method known as trend following. He subscribes to the concept of paying attention to what is happening rather than what may happen.

"If you take emotion - would be, could be, should be - out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings."

John Henry of John W. Henry & Company, Inc.

Our market model looks at "what is" and "quantifies it". The market's pricing mechanism continues to favor a risk-on allocation. Thus, we have continued to maintain exposure to U.S. (SPY) and foreign stocks (EFA). We also have exposure to leading sectors, such as small caps (IWM) and technology (QQQ). While not as far along as EFA, emerging markets (EEM) have shown enough to earn a spot in our allocation as well. When "what is" begins to shift to a more risk-averse profile, we will shift as well.

The bullish reaction to Wednesday's Fed announcement began to emerge in early September when investors' tolerance for risk began to improve. After the close on September 6, we noted:

Our market model did see incremental improvement during the week. Consequently, we increased our exposure to broad market positions (SPY).

SPX Daily Chart

Observable evidence, including the ratio of junk bonds to more conservative Treasuries, allowed us to participate in the market's recent gains. For the record, the S&P 500 has tacked on 70 points since we noted the "incremental improvement" on September 6. What do we do now? The tweet below from early Thursday morning summarizes our approach.

Chris Ciovacco Tweet

 

Back to homepage

Leave a comment

Leave a comment