This Thanksgiving season could be dedicated to the Fed in many ways.
One of the reasons that short-term sentiment about the market has changed is that the Fed is being friendly to the market. Since the about-face in policy that the Fed has supported since early 2019, the market has enjoyed some prosperity. Even after the last round of trade fear, Fed policy and the possibility of recession, the Fed has shown that it is willing to remain a friend of the marketplace.
One of the likely explanations is that, although at nearly 60-year record lows in unemployment, we still have exceedingly low inflation. That combination allows for the Fed to be accommodative in policy despite the length of this economic expansion cycle. When the inflation pressures are low, as they are now, there is less fear of overheating by the Fed. In fact, not only are we not observing overheating, but we have moderately low inflationary pressure and a Consumer Price Index (CPI) that is very stable.
This has enabled the Fed to be accommodative in policy and cut interest rates “mid-cycle,” which has the effect of extending the market expansion phase. When this happens, we observe an expansion of the Money Supply, and an expanding money supply leads to increased marketplace liquidity, and often, investment growth in the S&P 500 stocks.
According to Ned Davis Research, Money Supply net of Industrial Production and PPI Commodities, helps us know whether there is still room for market growth. This estimate historically has resulted in observed stock market gains of 11.85% (not including dividends) when the calculation results are more than 1.5%.
Currently that number is above 8.5%. The market tends to drop an average of 5.4% when that number is below -5.5%. It is not the only thing we should watch but is one reason why fighting the Fed (making investment moves contrary to Fed policy movements) is often a losing proposition for investors, especially outside of a recession. Here is how the plotted numbers look when compared to the S&P 500 over the past nearly 60 years.
The interpretation of this information leads us to the conclusion that it is quite possible, and even potentially probable that the Fed mid-cycle rate cuts are likely working for both the economy and stock market investors. This Thanksgiving remember to give special thanks for the Fed actions as you look at your investment statements.
More importantly than any investment portfolio, we are thankful for all of you, our readers, our clients and our friends. We really are thankful for you all. We wish you and your families a very happy Thanksgiving holiday!
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