April 8, 2018

Until the correction that began in late January, the stock market had marched upwardly unabated. Among the reasons for the unrelenting climb was that investors were being corralled into it. That is what happens when stocks are the only game in town. Although there are a number of investment vehicles, most folks pour their money into real estate, CD’s and money markets, bonds, and stocks. Real estate is getting pricey. Despite the recent Fed rate hikes, CD’s and money market accounts still yield a pittance. Then in early January stalwarts in the bond industry, particularly über guru Bill Gross, declared the beginning of a bond bear market. When Gross speaks, people listen.

Yes, equity prices are frothy, but a cooperative media, a smattering of good economic news, and a complacent public that does not want to miss out on the bus is a powerful combination despite President’s Trump’s recent tariff rhetoric. That too will pass as people realize this is Trump’s method operandi when it comes to negotiation and attention turns to earnings. According to Thomson Reuters data, these are predicted to rise 17.7% for the S&P 500. Some have touted this earnings season as the best since 2012, but a check of S&P 500 earnings by quarter in multpl.com shows Q2 and Q3 2017 were higher. Other than that, one would have to go all the way back to Q3 2011 to get a beat.

The bond market’s demise is understandable. The Fed is intent on removing monetary accommodation and raising rates. This makes sense. The Fed wants to stem easy-money-led bubble formation and inflated asset values, as well as prevent inflation from rearing its ugly head. If you question the current version of the Fed’s resolve, you need look no further than Fed Chair Jerome Powell’s comments this past Friday, April 6. Regarding the Fed’s goals of 2% inflation, sustained economic expansion, and a strong labor market, the Fed Chair stated, “my FOMC colleagues and I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote those goals.” For those thinking the Fed may wobble given the ongoing correction, Powell put the kibosh on that when he warned that raising rates too slowly would force the Fed to tighten monetary policy too abruptly down the road. Ostensibly, those steadily raising…

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