Fed is Committing Policy Error; Bear Market is Related to Recession, But Currently Economy is in Good Shape

A portion of the Fund managers and analysts including myself was anticipating a pause to the long running interest rate hiking cycle, while some others were expecting a hike of 25bps. Both wanted to hear a dovish commentary which would point towards a no hike season in 2019. The U.S Futures were higher ahead of the Fed decision, at some point it was up more tha a percentage point,later closed more than 1.5% lower, after the fed commentary.

I do not understand on what basis the Federal Reserve is taking its monetary policy decision. Do they really assess any data, analyse it before taking any decision or just come and present a commentary which was written months before just changing the numbers, without incorporating the latest economic data. I believe they follow the latter method. They are doing it with a predetermined mindset, that means they have previously decided to hike so many times and they are just doing it irrespective of the changing economics. Even in the commentary Powell mentioned that there may be two more hikes in 2019, of course reduced to 2 from 3. Fed should work in such a way that they can give clear signals to the market with respect to growth, trade and try to reduce the volatility, instead what we see here is that the Feds policy error has spooked the market volatility instead of containing it. They are committing a policy error, not doing proper homework and no consideration on the changing economics around us.

The S&P 500 index is now close to 9% lower from its all time highs and many analysts are pointing towards a bear market. This is another interesting thing, history has shown that the economy will go into recession 9 to 12 months after the yield curve inversion takes place. Now there is only marginal spread between short term and long term bond yields, so even if we see an inversion happening in 2019 after another round of rate hike, then recession will probably come in 2020.

U.S equities are one among the best performing ones globally and the market has stood out at a time when some of the other markets around the globe are already in bear market. Though it has broken its supports around 2600 level, I do not see a bear market anytime soon. A bear market will come when there is no growth, inflation not under control, rising unemployment etc. But now the situation is not like that we have the economy doing good, fuel prices declining, unemployment at low levels, inflation under manageable levels, corporates reporting decent earnings. Then how come analysts say that U.S markets are entering a bear market. Bear markets are related to recession and at present the economy is in good shape. I believe, we are still far away from a bear market and there is lot of value out there. After this long and highly volatile correction that we saw till now, it is good time to add stocks to the portfolio. This time around the feds comment was mildly dovish, so that gives us a hope and going forward if they really take future decisions based on the data, then we may not see any hike in 2019.

Historically, markets tend to react the wrong way initially following a rate decision, but later makes the correct move. I believe that S&P 500 index will find some support around 2470-2450 level and attempt a pull back and if it manages to take out 2650, then we might see some rally towards 2800. However, I do not expect market touching a new all time high. Whether it makes a new high or not depends on how the economy is progressing at that time. If I say that S&P 500 will touch 2650 then makes a new high then it will be just similar to how the Federal Reserve is taking its monetary policy decision without analyzing data.