The late Marty Zweig is credited with the saying 'Don't Fight the Fed'. In his book "Winning on Wall Street', which was published in 1970, he writes "indeed, the monetary climate - primarily the trend in interest rates and Federal Reserve policy - is the dominant factor in determining the stock market's major direction'.
That is pretty simple logic yet sophisticated market players are constantly questioning the Fed and the impact of its policy on the stock market. While they will admit that the market loves a dovish Fed they tell us that Fed policy will eventually lead to a major disaster and that market participants that don't recognize this fact are doomed.
The is no shortage of doomsday scenarios where the market and economy will be crushed by the huge national debt and the inevitable higher interest rates that may one day occur.
The Fed critics tend to be very smart and sophisticated folks with compelling economic statistics and theories but despite it all the simple advice of 'don't fight the Fed' continues to be the dominant market theme.
Not fighting the Fed has worked for over a decade and it is still working right now. Fed Chair Jerome Powell essentially confirmed what we already know, which is that the Fed is going to cut interest rates a quarter point at the end of the month. This has been anticipated for a while now, yet the market continues to rise on the news.
What confounds so many of the bearish skeptics is how the market never seems to fully discount this news. The indices continue to hit new all-time highs on news we have known for a very long time already. There doesn't seem to be a point where the dovishness of the Fed is already fully anticipated. If you have bet on a 'sell the news' reaction to the Fed then you know this well.
At some point, this confidence in the Fed will fail. The biggest corrections in the last decade have occurred when the Fed started to become more hawkish. The market simply can't get too many interest rate cuts and the Fed now seems particularly inclined to feed that addiction.
The best thing that market players can do is embrace the simple logic of 'don't fight the Fed'. You might think it's illogical and idiotic for that simple statement to keep working for so long but it does and that is all we really need to know right.
Jerome Powell will testify again this morning before Congress and then the Fed will be on hold until its meeting at the end of the month. In the meanwhile, earnings season will begin and the debate over the health of the economy will continue. As long as the Fed stays dovish the market probably doesn't care too much about other matters.
We have a positive start on the way and a market that is feeling quite content and complacent.
