As the markets continued to go higher and higher lately it became increasingly uncomfortable to stay long. For many, no doubt it is safer being on the sidelines before a major storm disrupts the flow. But where/when does it stop, and should we even be asking that question in the first place? As always, I will let the market tell me what to do and how to proceed, staying clear of making bold predictions and market timing calls.
We’ve been saying for months that the Fed is looking at the data the help them shape policy. While many still believe they are behind the curve I would disagree, this is exactly what they should be doing. Those who ‘front run’ the Fed trying to game a turn in policy are doing it the hard way. This Fed is more transparent about policy you they may as well be covered in saran wrap! Given the past foibles, secrecy and neglect the FOMC will not make a policy mistake if they can help it, and will tell their approach to everyone.
Last week the Fed convened their meeting and once again did not change rates, cut another 10 billion off the QE program and gave a brief update on their stance of the economy. Basically things are going according to plan for Chair Yellen and the Committee, though many pointed to some words of caution. I did not see anything mentioned that was alarming, but as we know the clock keeps ticking toward a change in policy. The Fed stated very clearly policy will be very accomodative to a long period of time (Fed Governor Plosser dissented over this language, but other hawks did not voice the same opinion).
The stock market will react to any form of news or information, and with volatility so low (complacency) it’s not a surprise with a big selloff like Thursday occurs. Keep in mind the Fed is NOT being restrictive. Some view the taper effect as a tightening in policy, and I can understand why that may be, but when the bond market is not impacted but a so-called ‘increase in supply’ then there is something else at work here. Low yields continue to confound and confuse everyone, yet the curve is still leaning upward (albeit a bit flatter through the month of July).
Concluding, the Fed really did not offer much to shake the trees, rather just the news was one of many excuses to sell (lots of geopolitical things happening as well). There are a million of ’em, but only one reason to buy.