We will maintain our locking bias

The stock market is climbing today, once again nearing all-time high levels.  The S&P 500 is currently at 2447, which is only a few ticks away from the 2450 level we identified at the beginning of this year as the market high target for 2017.  Although this may ultimately prove to be significantly under-estimated, there remains a strong case for stocks to experience a pull-back as the Fed looks to tighten their economic stimulus by reducing its balance sheet.  Although Fed rate hikes did little to deter stock investors from pushing stock prices higher, “Quantitative Tightening” could prove to have the opposite impact to stocks as “Quantitative Easing.” 

In her continued testimony to the Senate, Fed President Janet Yellen continued her discussion about the lack of inflation in the market.  Interestingly, she mentioned that the increase in opioids has contributed to the lower labor force participation rate.  She further discussed the Fed’s plan to reduce the Fed’s balance sheet.  Given that they will not be “selling” any securities, this is not as aggressive of a plan as many originally anticipated.  The goal is that there is as minimal disruption to the financial markets as possible.  Over the “many” years it will take to achieve their overall goal, she anticipates that it will drive longer term interest rates higher. 

Mortgage bonds once again find themselves battling the 100-day moving average.  Given the current weakness in the bond market, this could be a battle that bonds ultimately lose.  As we wait and see how this turns out, we will maintain our locking bias.