An Investment Plan for When the Fed Magic Fails

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“Do you have faith the "new era" of Fed-managed markets can continue to levitate stocks well above historical norms?” Is A Stock Market Crash Like 2000 Possible?

Investors have no idea the most considerable risk to their portfolio is if the Fed cannot continue to be a market magician.

In this article, I wrote: “Assuming the regression holds, and history has favorable odds of that occurring, I should expect the S&P 500 to fall to 2650 in the next two years.” That is the risk facing investors if the Fed fails to provide enough market liquidity.

If you worry about the Fed’s ability to keep stocks elevated, I present the playbook for surviving and thriving the tech bust of 2000. While times are certainly different today versus two decades ago, the analysis below helps us consider an alternative investment plan in case the Fed can’t come to the market’s rescue when needed.

But first, what might cause the Fed to stop the liquidity taps from flowing?

The Fed is running out of excuses

Persistent inflation is the biggest risk facing investors. By this, I mean that persistently high inflation is increasingly likely to result in reduced Fed accommodation for the markets.

The Fed has two congressionally chartered mandates against which to manage monetary policy: maximum employment and price stability. The labor markets are arguably back to full employment, as I discuss below. Prices are far from stable and in need of the Fed’s attention.

Labor markets

In What a Rate Hike in 2022 Might Mean For “Stonks”, I showed the labor markets are at or near maximum employment. Consider the following quotes from the article:

  • The popular U3 Unemployment Rate, at 4.6%, is only 0.2% above the average of the five years preceding the pandemic.
  • The U6 rate is 0.4% below the average of the five years leading to the pandemic.
  • The graph below shows there are 1.7 jobs available for every person that lost a job during the pandemic.
  • The labor market is fully recovered for those willing and able to work. The Fed has met its mandate.