Bull Markets Don't End Until the Fed Says So

The basic tenet of today's analysis of the stock market is that you can take it to the bank - the Central Bank that is.  When you have a Federal Reserve that is committed to boosting optimism, to boosting the economy, and likewise, to boosting stock prices, you are idiotic to listen to some guru suggesting that a bear market is coming.  Bull markets don't end until the Fed wants them to end, and I don't know of a better way to tell what the Fed is going to do - actually what they are already doing - than to monitor our Monetary Composite, which you can see the level of in today's Asset Allocation Model gauges below.

We have examined every nook and cranny to isolate those factors that history suggests are very bullish for stocks - meaning you are going to see easier money to boost spending and optimism.  We have isolated several different criteria in the areas of exchange rates, GDP, inflation, interest rate spreads and interest rates themselves, lending and leverage, monetary aggregates, and the velocity of money.  The exact relationship of some of these factors would surprise many of you, in that the good (bullish) conditions do not come from exactly their current status that the experts are telling you are bullish or bearish.  We just look at the facts.  But very often, it is a fact of scientific observation that when the news is worst, that is when the Fed is most aggressive, and thus when the stock market is most attractive.

So this week, as the Fed meets, here are a few of the items that might be at the forefront of discussion:

  • The Advance GDP number for the second quarter came in at 1.5%.  Some of the best theorists suggest we need a minimum GDP growth of 3.5% to really optimize our growth and debt situation.
  • The year-over-year rate of change for the leading economic indicators has just dropped under the year-over-year rate of change for the coincident economic indicators.  Traditionally, this has been a sign of weakness - and the point when the Fed really turns on a new easing policy.
  • Second quarter earnings are coming in and a definite pattern is emerging.  There is huge diversity, and if the bounce-back in the financial stocks had not have salvaged the overall report, the obvious reaction is that corporate earnings, and especially revenues, are weakening.

My point is that this seemingly bad news is likely to renew the Fed's determination to furnish more fuel - maybe innovative fuel - to encourage economic growth.  So, in our opinion, this bad news is good news if it keeps our Monetary Composite in its very bullish M1 position.

Don Hays

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