At what level is the Fed Put?

[KnightWhoSaysNit]

This article is a few days old, but I thought some of the numbers were interesting.

I have been trying to place a proper value on the S&P 500 index for some time now. I think it is way overvalued if the Fed moves quickly and controls inflation to the normal value (2%) within the next year or two. Otherwise the sky is the limit. Others see the same uncertainty, which explains the volatility in both the stock and bond markets.

The article suggests a level at which there would be a "Fed Put," which they have at about 3700. If we compare the pre-pandemic index value to 3700 we see that it matches tolerable inflation. In other words, if the market falls below this value it is seeing deflationary pressure, or inflation below 2%, a point at which the Fed would once again try to create inflation.

But 4400, and especially the 5000 that is expected, are not based on reasonable inflation. Those numbers get justified by an extreme increase in pre to post pandemic profit, which can be supported only through high inflation, given lower workforce participation and lower productivity. This is especially true in light of commodity pricing, oil in particular.

 

[fairfaxlion2]

We are entering a period sort of like 2000-03. The market needs to get rid of some companies that are overvalued based on stupid ideas that will never succeed. There will be an exit period. So while it might be reasonable to put long-run goals on the market, like 4500, 5000, etc, we have to first get through the period where some of the market exits completely. There will be a lot of wild swings in that period. Impossible to predict whether it goes up, down, or sideways over the medium term

 

[KnightWhoSaysNit]

We are entering a period sort of like 2000-03. The market needs to get rid of some companies that are overvalued based on stupid ideas that will never succeed. There will be an exit period. So while it might be reasonable to put long-run goals on the market, like 4500, 5000, etc, we have to first get through the period where some of the market exits completely. There will be a lot of wild swings in that period. Impossible to predict whether it goes up, down, or sideways over the medium term

There has been over speculation with extremely negative real interest rates, which as you point out, should get wrung out of the market with tighter money.

The Fed has simply lost control and has been way behind the curve. I see a confused market that the Fed will try to keep within range as it tries to reduce inflation. I don't see overall gains this year for that reason.

It's a good time to be relatively conservative in the near term. A balloon that continues to expand is fair game when the president has just publicly tasked you to control inflation. Think a reversal of what we saw in the summer of 2020.

On the other hand, like the article, I also don't see the S&P going below 3700. At that point the Fed will believe that they have gone too far and need to pump the economy.

The Fed supposedly has access to the best minds and data, but clearly they cannot predict inflation, or want to lip service inflation. They will use the stock market as a policy gauge. The Fed "put" is not going away. Careers are at stake.

Unfortunately, stagflation is a huge threat as base costs, such as for labor and energy, begin to soar. This creates big winners and big losers. Government intervention creates this problem, while elected officials think they are actually solving problems of imbalance. Fed included.

 

[fairfaxlion2]

The Fed supposedly has access to the best minds and data, but clearly they cannot predict inflation, or want to lip service inflation. They will use the stock market as a policy gauge. The Fed "put" is not going away. Careers are at stake.

I think they were missing a mind who said, "if we try as hard as we can to create inflation for 13 straight years, we will get it one day."