By CCN.com: The stock market is close to record-setting highs, yet one Wall Street strategist says don’t believe the Fed hype. UBS Group’s head of equity strategy, Francois Trahan, has a warning for investors – the Fed doesn’t pack quite the same punch as it used to. According to Trahan cited in CNBC, the “Fed Put” on the stock market, which Haas School of Business at the University of California, Berkeley describes as “strong accommodation following poor stock returns,” is no longer a reliable gauge.
“When it comes to U.S. stocks, the Fed put is dead. In the past 20 years, the so-called ‘Fed Put’ has failed to revive equities the way rate cuts did in the 1990s.”
The UBS strategist points to 2001 and 2008 as evidence when instead of rallying stocks fell on the heels of those respective rate cuts. Perhaps the difference this time around is that stock returns are not poor and economic indicators are largely positive.
Trahan’s cautionary tone seems to have fallen on deaf ears, as evidenced by a bullish stock market that is a whisper away from establishing a fresh high. The Fed hasn’t even done anything yet, though it is widely expected to this year, and the S&P 500 is within a stone’s throw of record levels. The index is currently hovering at 2,919 and its record high is 2,945. Bullish market strategists believe that stocks have more runway for gains between now and year-end.
According to TD Ameritrade Network’s Oliver Renick, the likelihood that the Fed will cut rates remains high:
“Worth pointing out the stock rally is happening while rate-cut chances in July, Sept, Oct all drop, though not by a ton. 82%, 95%, 97%.”
To be fair, the catalyst for the stock market gains appear to be two-pronged: a dovish stance by the fed and renewed optimism that the U.S. and China will sort out their trade differences at the upcoming G20 meeting in Japan. Nonetheless, even if the Fed Put technically hasn’t been working like a charm, the shift in market sentiment has coincided the Fed’s two-day meeting that is wrapping up today.
Something to keep in mind, as pointed out by Collaborative Fund’s Morgan Housel: “S&P 500 average annual return since 1957: 9.9%.” So far this year, the S&P 500 has generated returns of 16%.
Last modified: September 23, 2020 12:47 PM