For the past 7 years, the financial media has been extensively covering the Federal Reserve. Will they raise or lower interest rates? How high or low will they go? In fact, it was a fairly good predictor of what would happen in the stock market. Each time there was a rumor that the interest rates would rise, the stock market would crater. Conversely, the announcement would come that interest rates were falling and the stock market would rally. Juxtapose that with what just happened in December 2016. The rumor was that the Federal Reserve would be raising interest rates during their December meeting. However, the markets barely reacted. Why?
The economy was operating akin to a bike with a flat tire. When you ride a bike with a flat tire, you can in fact still move. The effort required to propel that bike forward is significantly greater than if both tires were full and operating efficiently. Additionally, the bike is less nimble. Making adjustments to impediments in the road require more effort than simply gliding around on two full tires.
Our economy has two tires that propel it forward. Monetary Policy (Federal Reserve) and Fiscal Policy (Congress, Senate, Executive branch). The Fiscal policy has been practically nonexistent. Constant gridlock in the Senate and Congress has led to our “Fiscal tire” to be flat, which requires our “Monetary tire” to bear the load of pulling our economy. Hence, the reason the stock market was driven so greatly by the Federal Reserve.
The Dow rose approximately 4.9% from January 1, 2016 to November 7, 2016. Conversely, the Dow rose approximately 8.2% from November 7, 2016 to December 30, 2016. That means approximately 2/3 of the Dow’s growth occurred during the final 37 days the stock market was open in 2016. All while the Federal Reserve was raising interest rates. Using the last 7 years as our guide, this should not have occurred. However, the “Fiscal tire” appears to be filling. The common belief is that the Congress, Senate, and Executive Branch will actually be employing stimulus to our economy for the first time in quite a while, which is why we have seen the stock market rally.
This is great news for our economy and stock market. However, there is nothing that has fundamentally changed since November 7, 2016. It is only the perception that things will be better in the future. Therefore, I believe we should be cautiously optimistic. If the “Fiscal tire” does in fact “refill,” the recent moves in the stock market are real. If there appears to be gridlock, we will likely see wild swings in the stock market. The first quarter of 2017 will be very important, so lets stick with those “mighty oxen” (see Behold the Mighty Oxen article) until we have some clarity.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
