“A rising tide lifts all boats” has become such a cliche that it even has its own Wikipedia page.
https://en.wikipedia.org/wiki/A_rising_tide_lifts_all_boats
The rising tide of Federal Reserve fiat lending at negative real yields has lifted all assets (stocks, bonds, real estate, etc.) since 2001 and especially after the 2008 financial crisis. An entire generation grew up investing with the “Fed put.” Does anyone even remember what a free capital market is?
https://fred.stlouisfed.org/series/WALCL
https://fred.stlouisfed.org/series/FEDFUNDS
The charts show that the flood tide of Fed money has risen and risen. Ebb tides were small and hardly made a dent in the huge flood tide. The Fed has jawboned about gradually allowing their gigantic book of Treasury and mortgage bonds to roll off but the chart shows that this process is laughably slow.
The huge flood of Fed money has pumped up stock, bond and real estate valuations to historic bubbles.
https://www.multpl.com/shiller-pe
The question is: Will the Fed’s actions pull enough money out of the markets to be a truly tidal change? Will prices and valuations drop along with the Fed’s policies?
The Fed has been tasked with reducing consumer price inflation even though the Fed’s actions (lending to banks) impact asset prices much more than consumer prices. The Fed’s actions didn’t increase CPI. Consumers spend when they have money in their pockets to spend, and this didn’t increase dramatically until 2020.
https://fred.stlouisfed.org/series/M1SL
Nobody expects a cup of coffee to go back to costing a nickel or a slice of pizza 15 cents. Monetary authorities regard deflation as a horror to be fended off at all costs. (Even though inflation degrades the value of saving and helps debtors.) Will stock valuations ever return to their historic median?
The Fed will continue to raise the Fed funds rate until inflation subsides to the 2% they want to see. As all METARs know, it’s hard to slow the economy without causing a recession.
Stock and bond prices have included the expected fed funds rate increases but not yet the impact of recession.
https://www.nytimes.com/2022/07/22/business/stock-market-wal…
**Why You Should Be Wary of Wall Street’s Upbeat Stock Forecasts**
**Amid rising inflation and the threat of recession, corporate earnings are coming under pressure.**
**Why You Should Be Wary of Wall Street’s Upbeat Stock Forecasts**
**by Jeff Sommer, The New York Times, 7/22/2022**
**...**
**Earnings reports may have an outsize impact on short-term market movements this season, even if the information being offered is usually sanitized and meager in substance....**
**Fundamentally, the data arriving now may depict a late phase — maybe even the last one — of a broad expansion in corporate profits that helped to fuel the stock market from March 2020 until the beginning of this year. Energy companies continue to thrive, but nearly every other sector is facing difficulties...**
**“We’re clearly on the downside of the profits cycle, but you don’t see that in the Wall Street estimates, not yet...”** [end quote]
The Fed’s stated intention is to tighten money and slow the economy. Even if a recession doesn’t result, corporate profits will be reduced. The stock bear market doesn’t reflect that second stage yet.
Meanwhile, the European Central Bank has changed policy in a way that could potentially cause a reprise of the 2010-2011 European debt crisis that negatively impacted the U.S. stock market (not to mention European stocks).
https://www.wsj.com/articles/the-central-bank-that-holds-the…
**The Central Bank That Holds the Fate of Nations in Its Hands**
**The ECB’s growing political role makes investing in Europe harder**
**By James Mackintosh, The Wall Street Journal, July 23, 2022**
**...**
**Europe’s on the way to being run by the officials of the European Central Bank.... The decision by the central bank’s governing council to give itself what its head, Christine Lagarde, called “sovereignty” to choose when, if at all, to support the bonds of troubled eurozone countries takes it well beyond what a normal central bank would do...**
**When countries hit problems and their bond yields jump relative to safe German bonds, the ECB can use its new power to buy the bonds and push yields back down, without waiting for the European fiscal authorities [individual countries' governments] to act first...We don’t yet know how the ECB will use its new tool, dubbed the transmission protection instrument, or TPI...**
**The ECB will no longer require countries first to take help from the European bailout fund and invite in the International Monetary Fund, which reduced the perception that it wielded arbitrary power....** [end quote]
The European PIIGS haven’t stopped oinking. Over the past 10 years, monetary policies have reduced the cost of borrowing but debt-to-GDP ratios are still growing. At some point, this will affect the markets.
The Control Panel shows slow recovery in the stock market. The Fear & Greed Index has improved to Fear. The trade is neutral but moving slightly more toward risk-on.
The Treasury yield curve has flattened. The fed funds rate (overnight) increased while longer-dated Treasury yields declined slightly. The USD is in a strengthening channel.
Commodity prices are falling, except natgas which is rising.
The METAR for next week is partly sunny. The stock market is becoming cautiously optimistic but everything depends upon earnings reports.
Wendy
https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…
https://www.cnn.com/markets/fear-and-greed
https://stockcharts.com/freecharts/yieldcurve.php
https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…
https://stockcharts.com/freecharts/candleglance.html?$GOLD,$…