In many ways, though, the overall stock market, economy and Federal Reserve policy don’t suggest that a bear market is looming, say longtime money managers and economists.

While continued turmoil in stock prices is likely, bear markets usually occur “when the Fed is trying to slow the economy down and other events intervene to make things worse,” says Ethan Harris, co-chief economist at Bank of America Merrill Lynch, part of Bank of America.

The last two bear markets struck after the Fed raised target short-term interest rates to cool inflation and a hot economy. Now the central bank is holding rates down even as it begins winding down its bond-buying program.

“The Fed’s message is that it is the good cop, not the bad cop,” Mr. Harris says.

If stocks swoon or economic growth falters, the Fed likely would try to steady the market, economists and money managers say. That wasn’t the Fed’s posture before the last two bear markets. (Emphasis added)

From a WSJ article by E.S. Browning titled: Stocks Stumble, But Hope Lingers

Just a few thoughts:

  • What if the Fed doesn’t have to try and slow down the economy? What if it happens all by itself? What if the market perceives the end of QE the same as it has interest rate hikes in the past? Wouldn’t the market act the same as it always does in a recession regardless of how we got there? Are interest rate hikes the only way we can have a recession?
  • Good cop, bad cop? What is this a bad cop buddy movie? Will Nick Nolte or Eddie Murphy be conducting the next post FOMC press conference?
  • Wow. That Fed will keep the market from falling meme really does have some legs doesn’t it? Why didn’t they keep it from falling in 2000? Why didn’t they keep it from falling in 2008 if they have so much power over the stock market? It seems to me that “if stocks or economic growth falters” we’ll intervene has been the Fed’s posture since, oh, I don’t know, about 1987?

The Fed put has existed since at least the LTCM debacle and the Asian crisis in the late 90s. It did not prevent two bear markets in the last decade and it won’t stop one now if that is what is in store. The bear market will come when the next recession comes regardless of its source. It could be Fed action or it could something else or it might not have any trigger at all. Over the last few weeks the message of the market is pretty simple. Both bonds and stocks have acted in a manner consistent with reduced growth expectations. Markets are not always right and if they are wrong this time, the stock selloff/bond rally will end. Until it does I’d suggest listening to the market rather than inane commentary from the perpetually bullish.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or   786-249-3773. You can also book an appointment using our contact form.