EC The Silencing Of The Bears

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If one dissects the most important areas affecting risk assets like stocks — monetary/fiscal policy stimulus, macro-economic expansion (e.g., GDP, unemployment, etc.),micro-economic corporate data (e.g., earnings, revenue, debt levels, etc.), — then the evidence suggests difficulties ahead. Let’s evaluate each arena:

1. Dramatic Fed Shift From Tightening to Neutrality 

Even before the monstrous 19.9% downturn in the S&P 500 in the 4th quarter of 2018, I frequently posted a Fed Funds rate chart. (See below.) In essence, the shift from tightening to attaining a neutral level buys a bit of time.

Historically speaking, though, things eventually turn southward. Recessionary pressures develop. And the Fed finds itself battling to restore investor confidence as well as consumer/business spending.

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With the overnight Fed Funds rate target at 2.25%-2.5% target, and the 10-year not much higher, the Fed is unlikely to raise rates again in this credit cycle. They’d be lucky to stay at neutral for an extended period.

We are already looking at a yield curve where inversions have occurred at various points between the 30-year Treasury and the Fed Funds overnight lending rate. The previous percent of inversions at the 40% level witnessed recessions occurring within 12-15 months.

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2. Peak Economic Well-Being Showing Sings Of Wear-N-Tear

Those who disagree with my analysis often point to the low rate of unemployment. They conclude, “We couldn’t be any further from an economy that is about to contract.”

I am not sure if armchair analysts understand cyclicality, particularly as it relates to employment data. Indeed, the data below show that the best returns are associated with unemployment at its worst (north of 6%) and the worst returns associated with unemployment at its best (south of 4.3%). Unemployment has been lower than 4.3% one-fifth of the time since World War II, with forward returns averaging just 1.7%.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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