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  1. Home
  2. / Investing
  3. / Stocks

The Fed Is About to Kill Off the 11-Year-Old Bull Market

The central bank's easy money fueled the past decade's gains on Wall Street, but the good times are coming to an end.
By JIM COLLINS
Aug 01, 2019 | 01:30 PM EDT
Stocks quotes in this article: VXX

It's fitting that the latest Federal Open Market Committee meeting concluded the same day that organizers of the "Woodstock 50" concert finally threw in the towel on attempts to recreate the magic that occurred at Max Yasgur's farm. As Jerry Garcia of the Grateful Dead (which performed at the original Woodstock) famously sang in Truckin': "What a long, strange trip it's been."

Prior to Wednesday's Federal Funds rate cut, the FOMC hadn't lowered interest rates since Dec. 16, 2008 - a day when the S&P 500 closed at 913.18. So while Federal Reserve Chair Jerome Powell's post-FOMC news conference sparked a 1.1% S&P 500 selloff Wednesday afternoon, we should put one day's decline into perspective.

The journey from the S&P 500's 913.18 close on Dec. 16, 2008 and its 2,980.38 close on Wednesday has been extraordinary -- a 226.4% return over 11.6 years. That equates to a 19.5% average annualized return, and that doesn't even count any appreciation from dividends, especially via reinvestment. That's just bananas.

Markets aren't supposed to rise that way. There's no one perfect number for an "average" annual market return, but New York University valuation guru Aswath Damodaran puts the S&P 500's arithmetic average including dividends at 11.36% for the 1928-2018 period.

The fact that the S&P 500 averaged annual total returns above 20% during the 11-1/2 years between rate cuts is a truly extraordinary event in market history. But "in market history" is the key term here. Anyone who's ever read a mutual-fund prospectus or heard an investing ad on TV knows that "past performance is no guarantee of future results."

The Fed drove this incredible 11-1/2-year equity boom by constantly injecting money into the financial system. In fact, the central bank hasn't sold a single U.S. Treasury bond since it started buying them up in 2008.

And as Powell announced Wednesday, the Fed's quantitative-tightening program (in which the central bank was shrinking its balance sheet) will end in August, earlier than had been originally scheduled. Of course, "quantitative tightening" equated to the Fed's decision not to reinvest the proceeds from its expiring bonds -- not a decision to actually divest any bonds that it already held.

God forbid the monetary spigot is eased even one bit. People would surely have a hissy-fit. And when I say "people," that includes the current resident of 1600 Pennsylvania Ave. -- a man whom Powell seems to listen intently to.

However, every investor knows that the market's "inflection points" -- where stocks change direction-- are always the most lucrative moments to act. The tough part is knowing that an inflection point is occurring while it's occurring, rather than saying two years after the fact: "Oh yeah, I should have noticed that."

Well, I think we're at an inflection point right now, which is why I recently formed a new company strictly to short stocks. And man, is that strategy working for me so far.

I went long the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) into the Fed press conference, and as soon as Powell started speaking, that trade became a big winner. A low VIX is only a characteristic of a market that's also exhibited low trading volume and a lack of worry about anything.

But this isn't Soviet Russia -- stocks don't buy you, you buy them. When you pay too much for them, you lose money.

That happened in 2000 and 2008, and I believe that Powell and his merry band of men and women at the FOMC have created the environment for yet another selloff in equities. So, that's why I'm doing what I'm doing with shorting.

I'll present more data in an upcoming column to back up my belief that despite Wednesday's pullback, stocks are still wildly overvalued here. But for now, I'll note that Jerry Garcia sang in Franklin's Tower: "If you plant ice, you're gonna harvest wind." I'll take Jerry Garcia over Jerry Powell any day -- and on Wednesday, the market agreed with me.

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TAGS: Short-selling | Federal Reserve | Investing | Markets | Stocks | U.S. Equity

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