The FED screwed up?
Summary - What To Do
Given the indebtedness of the economy, public, and private, the pace of monetary tightening was far more aggressive than most investors realized. The impacts can be seen in the rate of deceleration in bank credit, bank assets, money supply, and the yield curve.
Given that monetary policy works with a lag, the impact was not seen immediately, allowing the S&P 500 to rise rapidly.
The surge in stock prices made the Federal Reserve tighten policy even more aggressively which we can empirically see is starting to slow the economy.
Even if the Federal Reserve stops tightening policy now, the effects of 2018 tightening are still going to ripple through the economy as the underlying economic conditions are much weaker than headline GDP suggests.
The market is responding to a slowing economy, not trade wars or hush money payments; those are sideshows.
Economic growth will continue to decelerate which should cause more volatility in the stock market.
What I have been telling members of EPB Macro Research since the summer of this year is to position for an environment in which growth and inflation are both decelerating. At EPB Macro Research, such an environment calls for an increased allocation to cash, an overweight position in defensive sectors such as utilities (XLU), a position in long-term bonds with the expectation of lower rates, and to avoid or short high growth, high momentum sectors such as technology (QQQ) (XLK) and bank stocks (KRE).
This positioning has resulted in a dramatic outperformance, so far, in Q4.
The Federal Reserve has pushed monetary policy too far. It makes sense that the market is rapidly pricing out future monetary tightening. There is a high probability that if the Fed raises rates in December, this will be the last hike of the economic cycle.
Even if no rate hike occurs, balance sheet reductions will still be running in the background, reducing excess reserves, putting further strain on the banking sector and perpetuating a deceleration in economic growth.
The Federal Reserve has already pushed too far.
https://seekingalpha...ve-far-now-late
