To be sure, there are those that remain concerned about the state of the U.S. economy. The glass-is-at-least-half-empty crowd used last week’s weaker-than expected Non-farm Payrolls report as Exhibit A in their argument. And while the more upbeat economic crowd cites the timing of data collection and various other “technical issues” with the jobs report, yesterday’s JOLTS report presented a very strong rebuttal.

You see, the Labor Department reported Tuesday that Job Openings in the United States came in well above consensus expectations and hit a new high in the process.

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Source: Wall Street Journal

And with the nation’s Unemployment Rate moving to a new low for the cycle and below the level deemed as “full employment,” Janet Yellen’s merry band of central bankers agree that the economy – as measured by the jobs market – is in pretty darn good shape right now.

Given that the Fed only has two official tasks (full employment and stable inflation), this means that the odds of Yellen & Co raising rates at the conclusion of next week’s FOMC meeting currently stand at about 100%. And no, this is not news.

Don’t Fight the Fed?

From a macro perspective, it is important to note that the Fed has clearly embarked on a tightening cycle. And since these cycles have historically resulted in recessions, this is a primary reason why many of my big-picture stock market models are waving yellow flags here.

One of the oldest clichés on the street is, “Don’t fight the Fed.” The reason this sentiment has become revered over the years is simple. The Fed usually gets what it wants and it controls the money.

In fact, of the sixteen tightening cycles seen in the last 103 years, thirteen have resulted in recessions. ‘Nuf said.

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Different This Time?

The question, of course, is will this time be different?

The bullish argument is that yes, this time is indeed different. This time, the Fed isn’t trying to slow the economy or fight inflation. No, this time around, Yellen’s bunch is simply trying to return rates to more normalized levels after a protracted period of extreme accommodation.

Both Ben Bernanke and Janet Yellen have gone out of their way to communicate their “normalization plan” to the markets. They have tried to make it clear (as in “crystal”) that the Fed is NOT embarking on a traditional tightening campaign, rather the Fed is merely trying to get things back to normal.

From a stock market perspective, traders seem to be onboard with the plan. The thinking is that this time around, the rate hike campaign is actually a good thing because it means the economy no longer needs the monetary life support that has been provided by the Fed for the past nine years.

What Could Go Wrong?

Unfortunately though, the bottom line is the Fed has a history of “overshooting” with their rate campaigns. Remember, 81% of the time, the Fed’s rate hikes have produced recessions. And with the current economic rebound being the weakest on record in the post-war era, the fear is it wouldn’t take much to squash the economy’s current upward momentum.

So, despite the improving economy and good earnings, this is one of the reasons that my trusted, big-picture market models are not in their “happy places” at this time.

Could it be different here? You bet. The monetary warnings can certainly be “esplained” away this time around. As such, my model warnings may look silly in hindsight.

But one thing I have learned in my 30+ years of managing other people’s money is that ignoring risk factors such as monetary conditions and valuations is a great way to be “surprised” when bull markets morph into bears. While, my current cautious stance may turn out to be unwarranted, I prefer to stay in tune with the overall environment. And at this point in time, this means it is time to turn off the turbo chargers in your portfolios and to take your foot off the gas a bit – just in case there is an unexpected curve in the road ahead.

Thought For The Day:

Remember, no one plans to fail…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

    1. The State of the U.S. Economy

    2. The State of Earning Growth

    3. The State of Trump Administration Policies