The Fed and the Economy

We begin with a recap of the March Federal Reserve meeting. The Federal Reserve has changed their story at each consecutive meeting- which is their prerogative it is their ‘show’ after all. The market is at their mercy. Last year they said they would raise rates four times, which quickly became not raising at all, then raising two times, then back to four times. Chair Yellen moved back to two times again at the last meeting. No one except the members of the Fed, (and perhaps the Bank of International Settlements or Members of the G-20), ‘know’ the outcome. The Fed noted there is low inflation but instead of coming out hawkish based on that fact, the Fed statement was the most dovish they have been in a long time. The bottom line is the Fed is talking out of both sides of their mouth. They mentioned that economic conditions in the U.S. make our country the best economic environment in the world; while acknowledging the current U.S. GDP rate was 1%, (as of the last official reading). So, what happened after the announcement? Emerging markets went down, the dollar went down, the yield curve steepened a bit (it had been flattening), Gold went up, commodities went up, and the U.S. market remained basically flat. It looks like markets are expecting inflation- at least for right now.

If you haven’t caught the latest housing data here it is:

Existing Home Sales came out today. Normal is 6M units; the current rate is 5.08M.

New Home Sales were released on 2/24. Normal is 600K units sold, the most recent release is 494K units sold.

New Home Permits were released on 3/16. Normal is between 1.4-1.6M permits, current is 1.167M permits.

New Home Starts were released were also released on 3/16. Normal is 1.4-1.6M, current is 1.178M.

In general, these numbers are about 20% below average and are not moving in a positive direction. Markets are closed Friday for the Good Friday, Easter Holiday. Economic reports are released though, and the third and final Q4 2015 GDP will be reported on Friday to the closed market.

The U.S. markets are back in the approx. channel of 1975 to 2050 for the S&P. There are two channels above the 2050 resistance; 2050-2100 and 2100-2150. With earnings season kicking off soon, there is little hope that markets will move significantly back into these higher channels. There is very little buying power in the stock market, with the exception of corporate buybacks. Corporations have a black out period during earnings season when they are forbidden to buy back their own shares, (or support their share price). Using Q1 as an example, investors should expect low volume and lower prices as earning season kicks off. The U.S. markets have been in a transition for about a year and a half, since QE ended. Markets are making lower highs and lower lows which is very positive for the MCS strategy, not so good for the buy and hold crowd. The market is taking back the excess valuation that was built up during QE and has already wiped out the last two years of profits for buy and hold crowd. As this situation continues to unfold, we expect additional excess valuation to be erased- possibly back to the 07 and 00 highs. When the Fed flooded the market with ‘free cash for corporations’; there were no low risk opportunities since the situation had never happened before- it had NEVER occurred. Now markets are reacting more and more normally as the distortions are being eliminated.

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