Listening To Yellen

Listening To Yellen

Today’s MarketCycle’s Musings, written on July 15, 2017,  will be very brief.  Recently, stock markets have been showing signs of being on the verge of a correction of around 10%.  Janet Yellen, who is likely seeing the same thing, came to the rescue on Thursday (July 13, 2017).  Negating earlier comments, she announced that the Federal Reserve would remain highly accommodative (which means low rates) for longer.  Investors should not fight the Fed when it maintains an ‘easy money’ policy, so stocks will love this.  Assuming that she sticks with this new policy stance, this may create a scenario where the S&P-500 attempts to run euphorically higher from here, perhaps toward 3000, but we should still expect more than one temporary (5-10%?) correction between now and then.


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Yellen’s exact words:  “Because the neutral rate is currently quite low by historical standards, the Federal Funds Rate would not have to rise all that much further to get to a neutral policy stance.” 

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The market in 6 CHARTS (print function is below):

United States S&P-500 is bullish near term:

United States S&P-500 is bullish long-term:

Janet Yellen

Pullback?  At some point we have to get a pullback in this ongoing bull market; we have now gone one full year without one (see far right on the chart below).  Pullbacks are like a tea-kettle letting off excessive steam, they are a necessary part of all bull markets but are usually less frequent during the euphoric final part of the late-stage of the market cycle (this chart is the same time-frame as above… and both also clearly show the 2 year sideways period from mid-2014 to mid-2016).

Janet Yellen

Developed Market stocks have finally broken out to new record highs (far right on chart) and would be leading the United States in relative strength if the Euro Dollar weren’t still bearish long-term.

Janet Yellen

Emerging Market stocks have finally broken out of their sideways trend channel (far right on chart) and are now leading the United States and other developed markets in relative strength; Emerging Market currencies are bullish, which adds to the strength.

Janet Yellen

Inflation is finally picking up again (which further strengthens Emerging Market stocks):

Janet Yellen

SUMMARY:  The bull market continues (late-stage) with possible turbulence directly ahead.  Near-term may offer a temporary 5-10% stock pullback; longer-term still fully bullish.  With interest rates remaining “lower for longer,” extended-duration Treasury-bonds can offer portfolio protection with minimal downside but with a larger upside potential should stocks fall this summer.  Several of the things at which we look are suggesting that a recession is finally on the distant horizon, but not likely during the next 12 months.  This is also indicated via our unique and proprietary take on the Hindenburg Omen (which has triggered only 5x in 35 years, including June of 2017, and like the yield-curve, it always triggers very early as a leading indicator).  This next recession may include an S&P-500 loss of 33%+.  An economic-recession can be highly profitable for those few that are able to clearly see it ahead of time and reposition their portfolios.

Thanks for reading!

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Article by Stephen Aust, MarketCycle Wealth Management

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