There are those out there who extol the virtues of the relationship between the Dow Transports proxy (IYT) and the Dow Industrials ETF (DIA). In particular, if IYT does not eclipse its December 29 highs/resistance level, and DIA breaks below lows set in January, the market environment might then become bearish. Right now, even as DIA falls below a short-term 50-day moving average, it does not appear ready to plunge below late January lows.
Nevertheless, the Fed lowered its growth expectations for the US economy for 2015, 2016, and 2017. Equally concerning, we’ve already witnessed Fed officials suggest that they will not be impatient, nor will they necessarily raise overnight lending rates at any time in 2015. Making matters more delicate, GDP growth expectations for Q1 as recently as February have been scaled back to as low as 0.2% (by some models) from a previously more upbeat 2.5%. Others would not be surprised by a negative number. (How crazy does a recession sound if GDP comes in negative for Q1 and the Fed is still talking about possible tightening in the summertime?)
As unlikely as an upcoming recession may seem, IYT and the transportation sector may be more prescient than anyone would like to believe. My colleague Rob Charette uncovered some statistical evidence based upon the 35 stock bull markets since 1900. In brief, if the current uptrend does not surpass its March 2nd peak in the next 30-40-days, there is a high probability that the next bear market may have already started. What’s more, bears in major stock averages tend to be leading indicators of recessionary pressure.
Recession possibilities notwithstanding, I doubt the will power of the Federal Reserve to raise overnight lending rates beyond a face-saving 0.25% in the 2nd half of 2015. They may do so to maintain a measure of credibility. On the other hand, they will likely speak about the action in the same way that they removed the word “patience” from their forward guidance; that is, they may discuss an ultra-slow path of rate changes that may not even project a path of getting toward 1.0% by year end 2016, as well as mentioning data-dependency that would allow them to revert back to QE stimulus as necessary.
We are already seeing the volatile consequences of trying to back away from the electronic creation of currency. U.S. stocks are wobbly. The yield curve is flattening. And without greater Fed assurances of economic strength or monetary policy neutrality, investors may need to consider a diverse approach to hedging stock risk. National munis via iShares S&P National Muni Bond Fund (MUB), reverse carry trade currencies like CurrencyShares Japanese Yen Trust (FXY) as well as precious metals like SPDR Gold Trust (GLD) combine to provide a measure of protection. All three of these ETFs exist in the FTSE Custom Multi-Asset Stock Hedge Index (MASH Index).