Thursday, January 30, 2014

Bernanke’s Legacy - Lessons in QE and an 800 lb Gorilla

The Federal Reserve members bid farewell to Ben Bernanke at his last formal FOMC meeting on January 29th, 2014.  The story surrounding his departure as Fed Chairman for me is what he has taught the investing community about the power and limitations of Federal Reserve policy.  In addition, the forming story is that investors are beginning to adjust their portfolio to deal with the 800 lb gorilla he is leaving behind for Chairwoman Janet Yellen to manage.  His legacy, in my opinion, will be shaped by what happens to the $2.4 Trillion dollars (and still growing) in excess reserves currently on deposit at the Fed in the U.S. banking system.

Saturday, January 25, 2014

Financial Relativity Index Reflects Increasing Risk of Deflation Driven Market Decline

The status of the Financial Relativity leading equity market indicators as of 1/24/2013 is show in the table below.  The Financial Relativity Index is published and periodically updated on the FinancialRelativity.com website to track the health of the U.S. financial market.  

 

Re-Cap of Status on 12/31/2013



At the end of 2013 there were two cautionary areas which indicated slightly elevated risk of an impending market reversal, but as a whole the status for equity investing remained green.  The first yellow signal was triggered by the major market indexes trading above their previous all-time highs posted prior to the last correction.  The prior correction highs were set in 2008.  The history of “true” stock market corrections (where stocks decline on a year over year basis), not just a brief pull-back, shows that this market condition is necessary but not sufficient for a downturn to eventually ignite.  The elevated level of the market at the end of 2013 by itself did not mean it was time to run for cover, only to invoke a higher level of caution in equity investing going forward.  This signal can remain at a cautionary status for years before the other signals begin to confirm a market correction is imminent.

Wednesday, January 22, 2014

Mid-term Election Years and Stock Market Performance – What can be Learned?

Many prominent investing managers and firms are warning of a likely 10% stock market pull-back in 2014, so I figured it might make sense to assess what might cause the market to break-down.

You might be expecting my rationale for a potential 2014 pull-back in stocks to start with continued poor corporate revenue growth and low aggregate demand relative to the acceleration in share prices in 2013. Such an analysis, although relevant, would be far too rational an approach for the current political economy in my opinion.  Fundamentals have rarely mattered since the 2008 crisis, and I do not expect a change in the Federal Reserve driven 2014 economy. The current stock market is pricing in slow but steady growth and a Federal Reserve that continues to remain a backstop for any downturn.  Who can lose in this environment?

But factors exist that potentially are not priced into the market.  And one that I find very intriguing is the potential change on the horizon that could be triggered by the upcoming mid-term election.