Fed Jawboning, Minutes Give Stocks A Lift

By: Chris Ciovacco | Wed, Apr 9, 2014
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Evans Picks Up Megaphone

Evans Picks Up Megaphone

On April 8, we outlined reasons to be concerned about stocks. The Fed pays close attention to the market's risk profile; maybe they didn't like what they saw. In addition to the Fed minutes that were released Wednesday, Charles Evans seemed to be carrying the "talk stocks back up" torch for the U.S. central bank. From Marketwatch:

Many people who argue that inflation is just around the corner have been repeating the same warning for the past five years, said Charles Evans, the president of the Chicago Federal Reserve Bank, on Wednesday. "I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation," Evan said in a speech at an economic policy conference in Washington D.C. Evans said he still sees the economic environment pointing to below-target inflation "for several years." Evans debunked current arguments that inflation is just over the horizon. He said that there is "substantial room" for stronger wage growth without inflation pressures building and added the Fed's large balance sheet is not a "classic warning sign" of inflation. Commodity prices also seem to be an unlikely propellent of inflation at the moment, he said.

Evans began making dovish comments Tuesday in an effort to calm tapering fears. From Reuters:

There is a real risk that the Federal Reserve could close the tap for monetary stimulus too quickly, a top official at the U.S. central bank said on Tuesday."One of the big risks is that we withdraw our accommodative policies prematurely," Charles Evans, president of the Federal Reserve Bank of Chicago, told a panel at the International Monetary Fund.

The minutes from the March Federal Reserve meeting were released Wednesday, providing another source of good news for those concerned about interest rates. From The Wall Street Journal:

The dollar weakened against other currencies Wednesday after details from the Federal Reserve's most recent meeting showed no signs of higher interest rates ahead. The minutes from the Federal Open Market Committee's March meeting discussed keeping interest rates low as long as inflation remained below 2% and made no mention of an accelerated time frame for raising them, said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank. DBK.XE +0.26% Lower interest rates have weighed on the dollar.


Investment Implications - Flexibility Takes Fed Into Account

Federal Reserve jawboning is one of many reasons to maintain maximum flexibility in the financial markets. Did Wednesday's pop in stocks materially change the indecisive climate on Wall Street? According to the chart below, not yet.

TLT:$SPX ishs T-Bnd 20+y/S&P 500 NYSE/INDX+ BATS

How about that Dow Theory non-confirmation we have been concerned about; was it cleared up? The Dow has not posted a new closing high, which means the answer is "no".

$INDU Dow Jones Industrial Average INDX

Wednesday's sharp reaction to the Fed minutes and statements from Charles Evans did little to change the market's risk-reward profile. Therefore, we made no changes to our current mix of stocks (SPY) and cash. The chart below, presented earlier this week, reminds us that periods of uncertainty can be resolved to the upside. Our cash will be redeployed when the market shows some conviction in some corner of the asset class world. We are just not there yet.

$SPX S&P 500 Large Cap Index INDX

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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