Don't Fight The Fed

"Never underestimate how wrong the consensus crowd can be." - Wall Street Adage

There is an old saying on Wall Street that you should never fight the Federal Reserve.  They are just too powerful and have too many tricks to bet against.  For this reason as the Federal Reserve wants the stock market to rip higher it will so you might as well jump on the bandwagon and run with the bulls.  Having lived this for decades it was very interesting to me to read and article published by John Hussman showing that the largest financial melt downs occur when the Fed is tinkering with the market and trying to manipulate prices.

It turns out that during these times stock prices have had a maximum of a 55% draw down while the worst draw down during non accommodative Fed policies was only 33%.  Hussman goes on to explain that the turn down occurs when the Federal Reserve accommodative policies can no longer provide benefit in the form of lowering interest rates further.  It turns out that while the Federal Reserve is lowering rates that the market performs at an average rate of return of 13.5% versus 8.8% when monetary policy is not favorable.  So there is a benefit but the problem is that the benefit disappears quickly once the effect of the stimulus wears off.

The next thing to mention on this is that while the stock market has appreciated dramatically over the past number of years only 10% of the citizens of the United States have benefited.  Taking a look at the total worth of the United States it has finally exceeded the previous high.  This is due largely to the stock market move but while the net worth is higher in total the majority of the citizens have a net worth that is less than 70% of what is was prior to the Great Recession.  This means that the wealthy have made a boatload while the less privileged continue to struggle.

With this in mind it is clear that while the wealthy have benefited the Federal Reserve policies are flawed.  Furthermore the benefit seen in the unemployment numbers recently are skewed as while it was reported that 165,000 new jobs were created, 228,000 of them were part time, meaning that full time workers lost 63,000 jobs!  That is not success and this is starting to show up in the poor numbers being published by the tech and retail companies.  Meanwhile the banks are making more money than they know what to do with as they are being given the golden hand shake by the Fed.

These are numbers to follow closely as it certainly appears that the power of the Fed to manipulate interest rates is waning and with it the market appears to be teetering on the edge of a significant pullback.  As with today though there will be a push to save the one metric that is working so I would not be surprised to see a follow through rally coming next week but do not get too over zealous as another Wall Street adage says; "What the wise do in the beginning, the fools do in the end."