Certainly Fed comments from yesterday’s FOMC meeting made it abundantly clear to even its most optimistic cheerleaders that it is more concerned about the economy than it has previously conveyed. In spite of its employment and inflation targets for tightening having been reached, it failed to budge on rates and sounded less inclined to raise them. That further diminished its credibility. We guess they doubt the employment data as much as we do.
Having pushed the boundaries of politically acceptable monetary options, and then some, the Fed has been forced to stick with its tightening rhetoric simply to lend credence to the notion that all is well and to give it room to ease when future market volatility erupts. The Fed has also been sounding reticent to employ the negative rate policies used by other central banks, mostly adhering doggedly to its bizarre propagandizing about raising rates in the U.S. because of “strong job growth,” while occasionally mentioning the possibility of going negative if the situation required it.
The U.S. is supposedly in the middle of a hiring frenzy of waiters, bartenders, and store clerks according to the very employment data that is strangely held out as proof positive of QE success. It is little wonder that wage growth remains poor when most of the new jobs being created pay so little. However, even the employment data seems out of sync with comments from retailers and restaurant managements who are describing the current environment as tough. Many major retailers are closing stores and recent earnings reports were mostly disappointing to say the least.
Economic growth is still stuck in the 0-2% range at best and has now hit a weaker stretch at the low end with inventories too high and new job quality too low. Central bank credibility continues to decline as the sense of “how much more can they do” and “we are still not out of the woods yet” is leading to the realization that asset prices are in many cases way out of line with what a rational business person should pay.
What appears to be a typical bear market rally with questionable breadth has done nothing to alter our view on the investment world as massive corporate stock buybacks and short covering appear to be the major sources of demand for equities. The Treasury bond market is not a believer in the economic rebound implied by the rally in riskier assets given how it is behaving. That only adds to our skepticism.
At the same time, our favorite valuation barometer of market cap to GDP remains in clear bubble territory and would imply serious risk to high net equity exposures. Those thinking that low interest rates justify exorbitantly priced stocks are simply ignoring data from prior low rate environments that suggest otherwise. The S&P 500 could be cut in half if we were to return to historical averages, let alone reach cheap levels.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.