In Easy Money We Trust

The Federal Reserve will hold its next meeting three weeks from today. And most market-watchers still expect U.S. monetary policymakers to announce another rate hike.

Of course, it’s not a sure thing. Just ask St. Louis Fed chief James Bullard. On Friday, he said the timetable we’ve previously been given might be "overly aggressive."

Now, according to the Fed’s most recent dot plot — which is essentially a roadmap to future interest-rate levels — we should expect to see rates around 1.4% by the end of 2017 and at 2.1% on Dec. 31, 2018.

It’s kind of funny that these targets could be considered aggressive in any sense of the word!

But the reality is that our entire economy — and particularly our investment markets — are highly dependent on easy money.

Indeed, I would argue that most major asset classes remain overly inflated by the Fed’s artificially low interest-rate policies.

After all, almost every single thing I’ve been concerned about has only gotten worse in the last several months — from turmoil in Washington to saber-rattling in North Korea.

Yet equity valuations keep stretching farther and farther above historical norms.

We had one day of downside last week. That was it! That was the most worry the market could muster.

  Is this simply too much money chasing any type of return?

  Is it a self-fulfilling cycle of past gains drawing in more and more investors?

  And is it the unfailing belief that the Federal Reserve is not only raising rates at a glacial pace but willing to head the other way at any hint of danger?

Yes. Yes. And definitely yes.

This isn’t merely my random opinion.

A few separate studies confirm a direct correlation between Federal Reserve policy and market action.

According to Bespoke Investment Group, the S&P 500 averaged a gain of 0.34% on Fed announcement days from 1995. That’s 10 times its normal daily gain.

Image credit: Bespoke

Meanwhile, a separate study from Ruchir Sharma, Morgan Stanley’s chief global strategist, found that 60% of the stock market’s gains came on Fed announcement days since serious easing efforts began in 2008. The average gain was 0.49% vs. just 0.01% on other days.

In earlier decades, this relationship was practically non-existent.

Both study periods ended before Trump’s election. But the bullishness has only gotten more-pronounced since then.

Banks. Tech stocks. All the past problem areas are soaring again. As is housing, which is now back above pre-crash highs — not just in hot markets, but measured nationally.

Bottom line: It feels like almost EVERYTHING is rising in value and the good times are back again. But that may have a lot more to do with monetary policy than many can admit. (Or realize.)

This week, we are getting some important pieces of economic data. And they could influence the Fed ahead of its June meeting.

Yesterday, the Institute for Supply Management said an increase in investment and hiring indicates that businesses have become more-optimistic about the economy going forward.

Of course, that is basically a rear-view mirror look at this point … largely reflecting optimism driven by Donald Trump’s election victory.

Today we’ll be getting new home sales numbers. Then, existing home sales tomorrow. And later this week, the government’s updated estimate for first-quarter GDP growth.

The Fed might could use weakness in any of these numbers as reason enough to hold off on another interest rate hike just a wee bit longer, and I would expect that to only fuel more optimism.

So by all means, keep holding quality income-producing investments. And hope that we really have passed through the entire storm caused by the last several speculative bubbles.

But don’t be surprised if we really haven’t.

Best wishes,
Nilus Mattive