Fed are Stock Jockeys

Let's not pretend like the Fed really looks that closely at jobs numbers or inflation, which is their dual mandate.  I think they have a single mandate now.  It is to control the S&P 500 in a slow and steady ascent.  They must have felt like the S&P 500 was getting short term overheated so they threw out another one of their empty forward guidances in the form of 3 rate hikes in 2017.  This time, they surprised the market which was expecting the status quo of 2 rate hikes for 2017 and neutral to dovish language.  Yellen didn't oblige.  Even though these forward guidances are mostly empty promises, this time the bond market is paying attention, so it means these promises aren't as empty as they've been over the past 8 years.  The difference between bond market expectations and Fed expectations is as small as I've seen since 2008.

Yellen is without a doubt a lot more hawkish than Bernanke.  She will occasionally say things which she knows the market will not like, and she doesn't really seem to care.  Bernanke was explicitly trying to pump up the S&P to as high a level as he could get it without losing all credibility.  Thankfully he decided to excuse himself from the position so he could cash out from his notoriety.

So with a newly hawkish Fed, what are we to make of the stock market?  I think little if anything at all, for now.  The equity fund inflows are through the roof, and will help perpetuate this market higher for the next couple of months.  The magical thing about this equity rally is that it is based on perception of tax cuts and infrastructure/defense spending, and it can't be disproven until Trump actually has the plan actually enacted, which will be in 2018.  So you can live in this fantasy world of how good things will be after Trump's fiscal stimulus gets put to work, and it won't be tested until 2018.  That is a long time to anticipate goodies, but it also keeps the hope alive even if the economic data comes in weak in 2017.

That fiscal stimulus hope is the tailwind for the stock market, and a headwind for the bond market.  So even though Yellen slowly tries to take away the alcohol from the party, the market is ignoring it because Trump is the one who is providing the punch from the other side.

I continue to stay away from the S&P 500 and will stay away until I see more volatility and/or signs of topping in the market.  The odds still favor trading from the long side in SPX but I don't feel comfortable doing that at these lofty levels.  The Treasuries look panicky today, and I wouldn't be surprised if we made short term bottom in bonds today or tomorrow.  Short-term, we should be locked in a 2.45-2.65% 10 year range.  In the intermediate term, there is more bond weakness in early 2017 as the Trump plan becomes clearer and more concrete.