Stocks rallied for the second straight week on light trading volumes as investors delayed the next leg down in the bear market for at least another week.
The Dow Jones Industrial Average gained nearly 250 points, or 1.5%, while the S&P 500 added 30 points, or 1.6%, to 1,948.05, lifting it above its 50-day moving average for the first time since Dec. 29. The Nasdaq Composite Index jumped 2% to 4,590.47.
All for the time being.
Bonds Are Finished
Investors appear to be as confused about the economic and market outlook as voters are about the political outlook.
While both parties move closer to electing candidates that may be the best reason to vote for their opponent, investors are left with similar choices among the least bad asset class.
Stocks remain under pressure from lousy earnings, a strong dollar, and continued commodities carnage, while bonds no longer exist as a viable investment alternative due to the deliberate policies of the U.S. Federal Reserve (and financial advisers recommending otherwise with respect to bonds are committing professional malpractice).
When low-yielding Treasuries, cash, and gold are the most prudent investment alternatives available (other than simply shorting the S&P 500), you know the environment is tough. Yet that is precisely the situation in which we find ourselves as a result of the failed fiscal policies of the Obama administration and Congress and the catastrophically misguided actions of the Fed.
Yellen: In a Corner, Out of Options, Out of Time
But the Fed is about to face an even bigger problem – it is about to run out of excuses to delay raising interest rates any further. Not that it needs any excuses – intellectual integrity and consistency long ago departed the halls of the Fed's headquarters in the Eccles Building in Washington, D.C. But with the "official" unemployment rate at 4.9% (the real unemployment rate is of course much higher because roughly 96 million people have left the work force) and "official" inflation moving dangerously close to the Fed's target, the fig leaf covering the Fed's fecklessness is about to fly away in the wind.
Personal consumption expenditures (PCE), the Fed's favorite inflation measure, increased year over year by 1.3% in December, their largest increase since October 2014. Core PCE rose by 1.7%, the most since July 2014.
This should not surprise anyone since the year-over-year drop in energy prices was likely to be lower this year than a year ago. With both of its mandates – employment and inflation – moving very close to their "official" targets, the Fed is going to have make up a new set of excuses to avoid raising interest rates in the months ahead.
And the case for doing so remains strong since an interest rate hike in the United States while Europe, Japan, and China are hell-bent on weakening their currencies will further strengthen the dollar and add additional downward pressure on commodity prices and S&P 500 earnings.
The Dollar Will Weigh Down Stocks
The stock market may have stabilized for the moment, but further dollar strength would send it lower.
Since the Fed believes that one of its jobs is to sustain high stock prices (it denies this but it is lying), it will be reluctant to do anything that would give additional teeth to the bear.
This is why I believe that, whatever the economic data says, Janet Yellen and her confederacy of dunces will not raise interest rates again in 2016.
The Markets Think the Choices Are Lousy, Too
Markets have a lot to worry about – an incompetent Fed, geopolitical instability, weak earnings, and now an election that offers a choice between a phony and a fool.
Politics matter for markets because the policies that result from election choices have an enormous impact on companies, earnings, and investment returns.
Markets are justifiably spooked by the possibility that a highly unpredictable Donald Trump could win the White House because there is no way to predict what his policies would be and whether he will be able to carry them out.
There are real problems such as healthcare, entitlements, and tax reform, as well as foreign policy challenges that need to be addressed before they morph into crises.
Without any sense of where the solutions lie, markets may retreat until the smoke clears. In markets, retreat translates into massive selling.
As it's shaping up, this election is the last thing the market needs if it wants to move up.
Let's hope it doesn't prove to be the straw that breaks the camel's back and turns a bear market into something worse.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.