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Hot off the presses, it’s a must-read from Mike O’Rourke of BTIG tonight regarding what some are calling the Fed’s Quantitative Neutrality.O’Rourke, who went bullish in early July, hasn’t sounded this down in a while.
Last night, we characterised the path the FOMC took at its meeting today as one that “risks becoming the worst outcome.” Making Replacement Purchases of securities is the option we liked least for the markets. On the positive side, in taking this course of action, the Fed has clearly indicated that they are willing to act should the recovery falter. On the negative side, in shifting policy the Fed gives credence to economic weakness, indicating that it warrants a response. The problem is this response will not move the needle in its influence upon the economy, and for every sign of weakness that emerges, investors will be looking for a response from the FOMC. Thus far, it is a positive sign that the market did not take today’s move and extrapolate it into a more pessimistic scenario. This offers hope that our fears may be unfounded. That being said, it is still early and the FOMC just officially eased policy and the S&P 500 lost 60 basis points today and the Russell 2000 lost 2%. If you are in the bullish camp with us, you don’t feel good about that result.
More importantly, the Fed is now part of the story. A few days ago it wasn’t, and that’s not good.
At this stage of recovery, you want Fed policy to be accommodating for investing, but you don’t want it to be the reason for investing. We view it from this perspective, from its April peak to its July low the S&P 500 dropped 17%. Despite the pain of the drop, there was a major positive for investors, barely a word was heard from the Fed. The lone exception was that the barely used Central Bank swap lines re-opened to help Europe. The equity market bottomed on its own and rallied on its own, without an adrenaline boost from the Federal Reserve. It is not often that the equity market experiences a correction of such magnitude, without being accompanied by a policy response from the Federal Reserve. Now that the FOMC is back into the mix and intervening, that healthy progress in the market is tainted.
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