Fed Speaker Leaves Many Doors Open

In a speech Monday to the Economic Club of New York, Federal Reserve Vice Chairman Stanley Fisher tried to shift focus away from the first rate hike and toward the process of rate normalization. From Reuters:

Much of his speech to the Economic Club of New York focused on the period after rates rise from near zero, which Fischer said could be "June or September or some later date or some date in between." Afterward, he said, the Fed would tighten or even loosen on a meeting-by-meeting basis based on economic data and unexpected geo-political risks. Explicit policy promises, he said, would play less of a role. "Whatever the state of the economy, the federal funds rate will be set at each FOMC meeting," Fischer said of the policy-making Federal Open Market Committee.

Indecisiveness Remains

It is typical for markets to become a bit fussy when the Fed is on the verge of shifting policy. The stock market has been following the indecisive script. As shown in the chart below, the broad NYSE Composite Stock Index has been quite volatile and moving sideways for nine months.

Risk-Off or Risk-On?

As the Fed postures, market participants have been jumping back and forth relative to their preference for more-conservative fixed income instruments (TLT) and growth-oriented stocks (SPY). If I invested in TLT in July 2013 and you invested in SPY, there would be no winner as of March 2015 (see below).

Investment Implications - The Weight Of The Evidence

The wild swings between risk-on and risk-off are part of the interest rate cycle equation. Our approach is to implement a "less is more" strategy until the market calms down a bit. Less is more refers to making fewer adjustments to our allocations during binary periods of risk-on and risk-off. Our market model governs our allocations and at some point action is and will be required. For now, we continue to hold an equity-heavy allocation with some offsetting exposure to bonds and currencies. As noted in a March 23 article, the big picture does not align with "a bear market is imminent" scenario, which allows for some patience with growth-oriented positions.