Fed to the Rescue (or Are They Too Late?)
The Federal Reserve has its next meeting this week.
They start today and conclude tomorrow afternoon with the all-important interest rate policy announcement.
This is perhaps THE most widely watched Fed meeting in recent memory. Investors are widely expecting the Fed to cut interest rates. By how much is still a hot topic of debate, but there’s a near-universal certainty rates are going lower.
And the Fed likes to avoid disappointing market expectations.
But here’s the real question investors should be asking right now: Is the Fed already too late?
Something Is Not Right Here…
Markets have been very complacent this year in the face of mounting evidence of economic weakness and falling corporate earnings estimates.
This at a time when investors have far too much faith in the Fed’s ability to “rescue” financial markets.
As you can see above, the Citigroup U.S. Economic Surprise Index (dark blue line) has plunged in recent months as one economic data point after another disappoints to the downside.
Also notice how the S&P 500 index (light blue) has typically shown a high correlation with the economic data. This means stocks slump along with mounting negative economic surprises.
This year, however, we’re not seeing the same correlation, at least not yet anyway. In fact, what you’re seeing above is the largest divergence in history between bad economic data and high stock prices.
Something Has to Give
Either the economy is about to turn around in a big way or stock prices will turn lower.
Ironically, if the economy does turn sharply higher, that would take away the Fed’s incentive to lower rates.
Other measures of investor complacency are on the rise as well. The CBOE Options Index Put/Call Ratio is at its lowest level since January 2018.
This was just before a sharp correction.
Also, measures of stock market volatility including the VIX index, the market’s fear gauge, sit at unusually low levels. Levels we haven’t seen since October of last year.
Once again just before volatility spiked higher as stocks tanked 20% in three months.
Taken together, these indicators don’t mean the end is near for the bull market…
But they do indicate markets could become a lot more turbulent heading into the fall.
Buckle up and start loading up on low-risk, high-quality dividend-paying stocks like the ones I’ve included here.
They are one of your best defensive strategies that could still turn hefty profits once the bull’s legs finally give out.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch