Don’t fight the Fed. And, maybe the Federal Government too

Among the better-known Wall Street maxims is “Don’t fight the Fed,” which speaks to the idea that monetary policy and the trend in interest rates determines the direction of the stock market. Or, more specifically, when the Fed is lowering, or keeping interest rates low, with an eye toward stimulating the economy, equities should do well, and when the Fed is raising, or keeping interest rates high, with an eye toward slowing the economy, equities should struggle. Directionally, the maxim holds, though incorporating Fed policy as a market timing tool is a tricky proposition as monetary policy tends to lag. Instead, it is more appropriate to approach monetary policy, the economy, and the markets from a high level - as is monetary policy supportive of economic growth and risk assets? Clearly, the answer to that question today is “Yes.” In response to the COVID-19 driven downturn, the Fed took interest rates to zero, injected trillions into short-term lending markets, and launched an unprecedented securities purchase program, which last week was expanded to include individual corporate bonds. Just when we think monetary policy can’t become any more supportive, it becomes more supportive. On the other side of the policy ledger we have fiscal policy - is the Federal Government taking steps likely to hinder economic growth and the markets (raising taxes, cutting spending, etc.)? Or, is it taking steps that would likely support economic growth and the markets (cutting taxes, increasing spending, etc.)? Similar to the Fed, the Federal Government and fiscal policy are all in when it comes to supporting the economy and risk assets today, as Washington, D.C. runs a massive deficit and so far has allocated $3 trillion in aid due to COVID-19. Just when we think fiscal policy can’t become any more supportive, there are rumblings out of Washington of a $1 trillion infrastructure package. The unprecedented policy response to COVID-19 was a key reason we were comfortable calling the March 23 low in the market as the low for this cycle. Maybe the maxim needs to be expanded to, “Don’t fight the Fed, or the Federal Government.”

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Tagged: weekly wire, market perspectives, Tim Holland, Federal Reserve, federal government, fiscal policy, monetary policy, COVID-19