Friday, February 28, 2014

Fairy Godmother
Fed Chair Janet Yellen presented the Fed’s semiannual Monetary Policy Report to a congressional committee in the House on Tuesday, February 11. She was scheduled to do so again before a Senate committee the next day, but the session was postponed until Thursday, February 27 because of a snowstorm. Previously, on several occasions, I’ve described Yellen as the “Fairy Godmother of the Bull Market.” The stock market has tended to move higher in reaction to her comments on monetary policy ever since she joined the Fed’s Board of Governors during October 2010.

She did it again last month. The S&P 500 is up 3.3% since the day before she spoke on February 11. It rose to a new record high by last Thursday’s close, and still higher on Friday to 1859.45, up 0.6% ytd and 6.7% from the February 3 low. It is only 8.3% below our yearend target of 2014.

In her past comments, Yellen often either signaled a continuation of ultra-easy monetary policy at the next FOMC meeting or confirmed that such decisions were made at the previous meeting. This partly explains why stock prices have tended to rise so often both before and after FOMC meetings since Fed Governor Yellen started sprinkling her fairy dust.

In her identical prepared remarks for both congressional committees last month, Yellen emphasized that the Fed’s monetary policy would remain on the same course as it had been under Ben Bernanke: “Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability.”

Under Yellen, the Fed’s number one priority will continue to be to avoid another Lehman-style meltdown and a depression. The second priority remains to revive the labor market. If so, then the “scary parallel” chart showing an amazing correlation between the DJIA from 2013-2014 and 1928-1929 isn’t likely to be a useful paradigm, as I’ve argued before.

The chart went viral over the Internet in late January and early February, heightening fears of an imminent crash. The relationship has started to diverge in recent days, with the DJIA moving higher rather than crashing thanks in part to Yellen’s comforting testimony. Of course, concerns about the Ukrainian crisis could send stock prices down again over the next few days, though I doubt that it could somehow cause a recession in the US and end the bull market.

By the way, bearishly inclined technicians also saw some correlation between the current bull market since 2009 and the previous one from 2003-2007. That paradigm stopped working last year as the S&P 500 rose into record territory contrary to the bearish script of 2007. A closer fit can be found between the DJIA from 2006-2008 and 1928-1930, though the magnitude of the most recent crash wasn’t as bad as the Great Crash.
(Based on an excerpt from YRI Morning Briefing)

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