Has The Fed Already Gone Too Far?

It is crucial for investors to understand that the Federal Reserve has not yet turned dovish and the Fed “Put” it not yet in place. Wall Street sometimes hears what it desperately needs, but that does not make it fact. While Jerome Powell has moved incrementally towards the dovish side of the ledger in the past few weeks, the Fed is still firmly in hawkish territory. If, however, Mr. Powell was actively reducing the Fed Funds Rate (FFR) and expanding the balance sheet, then we would have a dovish Fed. However, by just indicating that the FOMC might be close to finishing its rate hiking campaign, while still selling nearly $50 billion of bonds every month from its balance sheet, the Fed is still tightening monetary policy--and in a big way.

However, “The Fed is now dovish, so it’s a good time to buy stocks” mantra from Wall Street is a dangerous one indeed. This argument is false on two fronts. First, as already mentioned, Jerome Powell is still tightening monetary policy through its reverse QE process. Second, the fact that the Fed may be cutting rates soon doesn’t mean the stock market automatically goes up. The Fed began cutting rates in September of 2007 and reached 0% by December of 2008. Was it a good time to buy stocks during that time? No, it was a very dumb idea that cost you half of your investable assets. The market actually peaked around the same time the Fed began cutting rates and didn’t bottom until March 2009, three months after interest rates hit 0%.

Wall Street is gladly overlooking the current global economic crash—not slow down—and that means EPS for the S&P 500 going forward will be well short of the 7% currently predicted. In fact, we are most likely undergoing an earnings recession worse than what occurred during 2014-2016; especially when you factor in the fall in oil prices that will hurt the earnings of energy companies. Only, this time around there won’t be another once-in-a-generation tax cut to bail out stocks and the economy. Just the end of QE on a global basis pushing the financial world over a cliff.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, more

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