By Steve Blumenthal, CEO, CMG Capital Management Group
“We shouldn’t be raising rates before 2016.” Chicago Fed President Charles Evans, a voting member on the central bank’s policy making committee, told CNBC this week. The market responded favorably.
Evans said he’s hopeful that inflation will pick up. “I’d like to have more confidence that we’re going to get to 2 percent by 2016” and added, “2017 seems like the minimal allowable. To get there, I think we need more accommodation.”
I believe “Don’t Fight the Fed or the Tape” remains the primary theme for now. In this regard, I share a great chart this week that details the performance evidence behind this important rule. That jingle continues to ring in my head: “It’s all ‘bout that Fed, ‘bout that Fed, no trouble.”
From Evans, “I don’t want to get to a situation like Europe is in,” he added—referring to the euro zone moving into deflation. “I want to make sure to get U.S. inflation up to our objective. If it moves down, that’s a challenge.”
It’s not just Europe of course. Ambrose Evans-Pritchard wrote a piece this week titled, China quietly joins Asia’s currency wars to avert deflation as countries around them devalue, from Russia, to Japan, Indonesia and Malaysia. It is a war dance with the dollar as the global markets cling to every word from the Fed.
As you probably know by now, my favorite market trend indicator is NDR’s Big Momentum. I’ve followed it for more than 20+ years. The model aggregates the signals of over 100 component indicators and generates a reading between 0% and 100%, reflecting the percentage of the component indicators that are currently giving bullish signals for the S&P 500 Index.
It was designed to look at the overall technical health of the equity market. It’s kind of like you going to the doctor for blood work and a stress test.
The following chart combines trend with Fed policy. When the Fed raises interest rates (takes away the punch bowl), the markets generally do not do as well. In the next chart, the trend is the trend in yields. Historically, when 10-week Treasury Yields are lower than their 70-week linear regression (a moving average trend line), the S&P 500 has produced larger gains.
The boxes in the upper part of the chart shows the return when both trend and Fed policy (10-week Treasury Yield moving average is lower than its 70-week moving average) are favorable as well as when they are not favorable.
Again, historically, the S&P 500 has produced larger gains when the weight of evidence is positive. Don’t Fight the Tape or the Fed evidence remains positive today. See full story and important disclosures at On My Radar: It’s All About That Fed – Again.
Steve Blumenthal is CEO and Chief Investment Officer of CMG Capital Management Group. CMG manages tactical portfolios and strategies for advisors, individuals, and institutions. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long-term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek,” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.