With all the excitement and fanfare of hitting new all time highs there lurks a bogey out there that must be respected. The Fed committee and a potential shift in fed policy could quickly dampen the recent animal spirits. Markets always look forward in anticipation of the coming action, the greatest discounting mechanism around.
Yet, we cannot forget that liquidity remains the key to price action. Money flows in and stock prices rise, money flows out and prices fall. That may be a crude explanation, but at the core it is all truth.
The Fed next week is likely to pull the string and raise the funds rate for the second time in a year. That is far less than they planned or expected for 2016, where committee members often squawked about 2-4 hikes during the year. That turned out to be a bad forecast, but then again the Fed tries to put the ‘fear of God’ into everyone for no apparent reason (oh yeah, data dependent!).
In normal times, when the Fed is in a tightening mode that is not good for stocks or bonds, but this is not a normal situation following the financial crisis. Perhaps with some fiscal policy objectives outlined and executed from the new administration there will be ample time and opportunity for the Fed to unhinge from the markets without creating a shock. That is truly their wish.
