Fed: Then And Now

On October 2, the S&P 500 was trading within an eyelash of its all-time high. Then, Jerome Powell made the remark that interest rates were a long way from neutral. The stock market’s reaction to the comment is shown below.

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STOCKS TRY TO FIND A BOTTOM ON OCT 29

In recent weeks, weekly videos and Short Takes posts have covered concerning shifts in longer-term trends that occurred in the weeks following Powell’s October 2 comments. In terms of assessing shifts in the market’s longer-term economic view, a few charts can illustrate broad concepts. When the S&P 500 was trying to rally off the October 29 low, defensive long-term Treasury bonds subsequently printed a new year-to-date low on November 2, which hardly looks like a market concerned about the economy or a bear market.

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The same can be said for the long-term trend in the relative performance of bonds vs. stocks. After the stock market’s attempt at forming a lasting bottom on October 29, the bond-vs-stock ratio still had a downward-sloping 200-day moving average that was also printing a new YTD low.

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A NOTICEABLE SHIFT

Our approach makes decisions based on the hard data related to longer-term trends. As shown above, the hard data on November 2 still favored the trend in stocks relative to bonds and the tepid conviction to own TLT relative to the conviction to sell TLT was producing lower lows. If we fast forward to the close on December 19, 2018, we see a noticeable and measurable shift in the hard data.

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ANECDOTAL EXAMPLE OF SHIFT IN MARKET’S RISK TOLERANCE

We can make a comparison to an extreme historical case via a similar shift that took place in November 2007. The 2007 chart below and the 2018 chart above both reflect increasing concerns about the economy, earnings, and the stock market.

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BIGGER PICTURE - ANECDOTAL CASE

While we know every correction does not morph into a bear market and not every bear market morphs into a crisis, understanding what happened next in 2007 helps put some context around the model’s recent allocation decisions. Between the day the 200-day moving average for the TLT/SPY ratio had noticeably turned up to the final bear market low in 2009, the S&P 500 lost an additional 53.38%.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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