Where Do We Go From Here

Where Do We Go From Here

by Zach Marsh on Oct 15, 2021

This week the market seems to have shaken off the September slump. After struggling to put together a convincing rally during the last 18 trading sessions, the S&P 500 appears to be breaking out above previous resistance levels. If the market holds its current levels as of 12:30 pm very little stands in the way of it regaining the highs set in early September. However, much remains to be proven before we can confidently state that the persistent upward trajectory of the market will resume. While there seems to be ample narrative evidence to suggest headwinds for the market, namely persistent inflation coupled with reductions in the Federal Reserve’s asset purchase program, longer-term momentum still points higher until proven otherwise.

There are two investing adages that frequently get thrown around; the first is that “the trend is your friend,” the second is “don’t fight the Fed.” Currently we are on a path towards these two adages colliding. The Fed has been a major factor in asset price appreciation over the past 13 plus years, and that assistance has been multiplied since March of 2020. Since the Great Recession of 2008, the Fed has been stating that it seeks a 2% inflation target. Up until this year it has never really been able to achieve that goal. Now inflation is trending well over 5% and concerns are starting to materialize that this increase in consumer prices may not just be a temporary factor. To combat rising inflation the Fed will need to reduce its easy money policy or risk inflation spiraling out of control. This means that the Fed will no longer be the market’s greatest friend. This policy change is in direct conflict with the overall, friendly trend of the market.

In recent times the power of the market trend seems to outlive the first few tightening shifts in Fed policy. In 2004 the Fed began raising interest rates. Rates would continue to rise until 2006. During this time the Fed Funds rate climbed from 1% to 5.25%. During this time the S&P gained over 40%. In 2016 the Fed again began raising rates, albeit at a snail’s pace. By 2019, when the Fed finally relented, the S&P 500 had gained more than 40%. Each of these periods ultimately culminated with swift declines in stocks, causing the Fed to come back in with even greater force to stop the declines. This is all a long-winded way to say that just because the Fed may not be blowing with all its might at the back of the market’s sails doesn’t mean the market will immediately panic.

Much of this may be a depiction of what we just witnessed in September. The stock market expressed concerns over the change in Fed policy, but ultimately the trend may still win the day.  


Thanks for reading,

Zach and Dave





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