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In spite of the Fed’s decision to refrain from a borrowing cost hike, SPY’s price movement strongly suggests the ultra-accommodating policy of zero percent interest rates may be inadequate. We’re likely heading back to the recent low point for the current year. The reality is that our recovery is stalling and has been since the end of the Fed’s quantitative easing stimulus. In Selling The Drama Or Buying The Rally (8/27), I delineated the way in which 10%-plus price corrections had unfolded under similar circumstances in history (e.g., 1998, 2010, 2011, etc.). Specifically, when the prospects for the global economy are deteriorating, U.S. stock benchmarks typically reclaim about one-half of their losses on “hope rallies.” Afterwards, they retest their lows. The most recent example of the price movement phenomenon is the eurozone crisis. In late July/early August of 2011, the S&P 500 SPDR Trust ETF (NYSEARCA: SPY ) plunged 16% due to fears surrounding economic malaise and financial credit concerns in Portugal, Italy, Greece and Spain. The popular ETF then recovered one-half (nearly 8%) of its price decline in late August/September before revisiting new lows in early October. At that point, the European Central Bank (ECB) and the Federal Reserve dropped market-moving hints about extraordinary stimulus measures, effectively ending the panicky price depreciation. In the same vein, the present corrective phase for SPY stopped short at roughly 12%. The popular ETF then retraced about one-half of the price erosion (6%) on two recent occasions. And now, in spite of the Federal Reserve’s decision to refrain from a borrowing cost hike (probably for 2015 in its entirety), SPY’s price movement strongly suggests that the ultra-accommodating policy of zero percent interest rates may be inadequate; that is, we’re likely heading back to the recent low point of the current year. Shouldn’t the Fed’s September decision to hold off any increases in borrowing costs have catapulted the U.S. stock market higher? Shouldn’t we have seen speculative buying demand for riskier assets like high yield bonds and growth stocks? Not when the U.S. has been contending with a sharp slowdown in exports, manufacturing activity as well as consumer sentiment. Not when the Atlanta Fed forecasts anemic GDP of 1.5% for the third quarter. And not when chairwoman Janet Yellen acknowledges the absence of wage inflation as well as the the presence of labor troubles via the labor participation rate. Prior to the rapid-fire declines for the Dow, S&P 500 and Nasdaq in mid-August, I detailed these economic concerns in extraordinary detail. I highlighted the dreadful manufacturing data in the Philly Fed Survey as well the Empire State Manufacturing Survey in 15 Warning Signs Of A Market Top . On, July 30th, I pointed to economic weakness in both the U.S. and across every region of the globe as being one of 5 reasons to lower one’s allocation to riskier assets . Going into yesterday’s (9/17) monumental Fed decision, traders had been positioning themselves for further delay on an increase in borrowing costs. They got it. And yet, they got more than they had bargained for. Not only did the Fed highlight weakness in the global economy as a potential threat to the domestic economy, but they shot down the notion of so many economists and analysts that the U.S. economy is standing on “terra firma.” For amusement, revisit what the overwhelming majority of journalists and media personalities had been saying about the strength of the U.S. economy. After, glance at the analysis and commentary a day later. The chief economist at Natixis Asset Management explained that the Fed’s decision not to act demonstrates that committee members of the central bank clearly think that the U.S. economy is “very weak.” Oh really? Now the economy is very weak? Or how about Dan Veru, chief investment officer at Palisade Capital Management, explaining that the Fed doesn’t want to be responsible for possibly unraveling a “fragile recovery.” Fragile recovery? After six-and-and-a-half years? Wasn’t this the great U.S. expansion that was perfectly capable of a modest move away from the emergency level zero bound? Sometimes, the truth hurts. The reality is that our recovery is stalling and has been since the end of the Fed’s quantitative easing stimulus. This truth is painful for everyday Americans. The fact that corporate sales and earnings growth are both on the decline also stings because, absent a more definitive Fed commitment to zero rate policy or more stimulus or a sloth-like token hike, riskier assets are likely to struggle. In essence, at certain correction levels, the Federal Reserve tends to take certain actions and/or make certain statements to boost market confidence. That level for the S&P 500 is near 1870. Obviously, I cannot know that the S&P 500 will revisit 1870, but I believe it is far more probable than not. Let me repeat. I anticipate the broader S&P 500 retesting the lows of the current correction, though it is impossible for any person to predict the direction of stock assets. For those moderate growth/income investors that have been emulating the tactical asset allocation that I do for actively managed clients, we are maintaining the lower risk profile of 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents. This has been the case since we began reducing risk exposure in June-July. The typical target allocation for moderate growth/income of 65%-70% stock (e.g., large, small, foreign, domestic) and 30% income (e.g., investment grade, high yield, short, long, etc.) will not be reestablished until market internals and fundamentals show signs of improvement. Popular holdings for the 50% equity component? We have ETFs like iShares S&P 500 (NYSEARCA: IVV ), iShares USA Minimum Volatility (NYSEARCA: USMV ), SPDR Select Health Care (NYSEARCA: XLV ) and Vanguard Mid Cap Value (NYSEARCA: VOE ). Funds like USMV and VOE have weathered the storm better than many of the leading market-cap-weighted benchmarks. Disclosure : Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. Scalper1 News
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