Monday, December 22, 2014

The Fed Stays Friendly

In its final policy statement of the year the Federal Reserve, through a bit of wordplay, appears to have provided just what stock market bulls had hoped for.  After falling almost 5% from its early December peak, the S&P 500 put in another swift v-bottom after digesting the Fed's latest statement and Janet Yellen's press conference that followed.

Bullish investors were hoping for language suggesting the Fed would continue to be their accommodative friend and they got just that.  The new buzzword was "patient."  As in, they "can be patient in beginning to normalize the stance of monetary policy."  Yellen further clarified the intention of staying patient by saying "this new language does not represent a change in our policy intentions."  That was all Wall St. needed to hear on Wednesday as the S&P went on to finish up more than 2% on the day and then did the same again on Thursday.  These were the first back-to-back 2% up moves for the S&P since early 2009.

Coming out of the meeting it appears that Wall St. consensus continues to target June 2015 as the Fed's first rate hike announcement.  While we always hold a cautious eye toward the consensus view, we were reminded of a study Bespoke Invest ran back at the end of September.  They looked over the last 20 years to observe the performance of the S&P and its underlying sectors in the 9 months leading up to a rate hike.  If the June 2015 expectation is indeed accurate, this set of historical data suggests markets will continue to move higher over the next 6 months.

Note the broad participation.  Almost every sector is up significantly with Financials being the strongest.  Take a look...

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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