What The Fed Said, Didn’t Say, & What Happens Next

By Lance Roberts | June 22, 2019

, What The Fed Said, Didn’t Say, & What Happens Next

  • Review & Update
  • What The Fed Said & Didn’t Say
  • What Happens Next?
  • Sector & Market Analysis
  • 401k Plan Manager

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, What The Fed Said, Didn’t Say, & What Happens Next

Wednesday, June 26th from 12:30-1:30 pm.

Review & Update

Every week, we are fortunate enough to gain numerous subscribers to our weekly newsletter. So, first, I certainly want to welcome you to our missive, but I also need to brief our newest readers where we have been positioned over the last couple of months. 

On May 4th, we penned: “It Never Hurts To Ring The Cash Register:” we suggested taking profits and reducing risk in portfolios after a stellar run from the beginning of the year. We made specific recommendations to our RIA PRO Subscribers (Try Free For 30-Days) at the time:

A common theme through today’s report is ‘Profit Taking.’ Over the last couple of weeks, we have continued to discuss taking profits and rebalancing risks. Yesterday we sold 10% of our many of holdings prior to earnings to capture some profits. We also added to some of our Healthcare holdings, which have been under undue pressure and represent value in a market that has little value currently.”

, What The Fed Said, Didn’t Say, & What Happens Next

We also said:

“From a portfolio management standpoint, the reality is that markets are very extended currently and a decline over the next couple of months is highly likely. While it is quite likely the year will end on a positive, particularly after last year’s loss, taking some profits now, rebalancing risks, and using the coming correction to add exposure as needed will yield a better result than chasing markets now. Given that every given year has some corrective action in it, betting this year will be different is a low probability event.

What we didn’t know at the time is that the May sell off would start the next week. 

Then, June 1st, we wrote “Selloff Overdone, Looking For A Sellable Rally:” To wit:

“In the very short-term the markets are oversold on many different measures. This is an ideal setup for a reflexive rally back to overhead resistance.”

Again, for our RIA PRO subcribers, we recommended taking on index positions to participate.

(Click here for the unlocked report.)

, What The Fed Said, Didn’t Say, & What Happens Next
  • The “buy” signal in the lower panel was massively extended, as noted several weeks ago, which as we stated, suggested the reversal we have seen was coming.
  • The correction last week has set up a tradeable opportunity into June.
  • Short-Term Positioning: Bullish
    • Last Week: Add 1/2 position with a target of $290.
    • This Week: Hold position (full weighting)
    • Stop-loss remains at $275

The rally we have been discussing since the beginning of June has been a good trade and increased the value of our portfolios. 

However, for most investors, it has simply been a recovery back to the same level almost 2- months ago. 

This is why managing risk is important. 

Okay, now that you are up to date, let’s talk about what the Fed said, didn’t say, and what it means from here. 

, What The Fed Said, Didn’t Say, & What Happens Next

What The Fed Said, & Didn’t Say

On Wednesday, the Federal Reserve completed their two-day FOMC meeting (Federal Open Market Committee) and provided their prepared statement afterward. 

It is worth noting it is the SAME statement following each meeting with only slight wording changes each time. The text below shows those red lined changes in the release from the last two meetings. I am only excerpting the more important points for today’s discussion.

“Information received since the Federal Open Market Committee met in Marchyindicates that the labor market remains strong and that economic activity rose at a solid is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained lowGAlthough growth of household spending and business fixed investment slowed in the first quarter appears to have picked up from earlier in the year, indicators of business fixed investment have been soft.

The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

Wall Street voraciously searches for these changes to try a derive the Fed’s intention about future policy actions. It is akin to reading the “tea leave” in the bottom of a cup.

It was the last sentence above which got the bulls excited as it was interpreted to mean rate cuts.

However, what the “bulls” missed is the Fed DID NOT say the “would” cut rates, only that they would monitor incoming data and act appropriately. 

“The Federal Reserve on Wednesday said it does not expect any rate cuts this year, but did forecast one for 2020.” – CNBC

This is a far cry short of reducing rates 3-times this year, and more next year, pushing rates back towards the zero bound.

This leaves a lot of room for the markets to be disappointed. 

However, there is sufficient reason to expect the Fed will indeed cut rates, it is only a question of timing and by how much. 

As David Rosenberg penned last week:

“What does it mean when the real yield on the 5-year T-note is down to around 30-basis points and for the 10-year maturity, a mere 40-basis points? It’s the bond market’s way of foreshadowing the weak economy that lies ahead.

There can be little doubt that Powell took his cue from [the ECB’s Mario} Draghi and the ECB’s concern over the weakening growth backdrop and even deeper inflation undershoot in the Euro-area. I am talking about the recession. You know – the one that nobody ‘sees.'”

Given that the Fed has a very limited “toolbox” currently, I would expect them to use rate cuts VERY sparingly. Considering rates fall on average between 3-4% during a recession, the Fed is starting at just 2.4%. From a historical perspective, when the Fed does engage in rate reduction programs, it has not been an ideal point to be heavily invested in the financial markets.

, What The Fed Said, Didn’t Say, & What Happens Next

As noted by PNC this week:

“That would absolutely be a policy misstep. With industrial production data coming in ahead of expectations, retail sales ex-autos and gas beating up expectations, earnings season for Q1 beating and Q2 revisions moving in a positive direction, it just seems to me as if the backdrop doesn’t warrant that swift of a policy reversal and that cuts really shouldn’t be on the table.” – Amanda Agati

Also, the 10-year yield is hovering at just 2% and seems the equity market is under appreciating the probability of a bad scenario which is being embedded into bond prices. Given the bond market is a reflection of the “flight to safety” by investors, it suggests the “bulls” could be wading into a trap. 

(Note: it is NOT the inversion of yield curves which signal a recession, it is when those inversions reverse.)

, What The Fed Said, Didn’t Say, & What Happens Next

Lastly, the markets are already pricing in two events which haven’t even occurred yet:

  1. Rate cuts
  2. Trade deal with China

There is a decent probability that neither happens soon, and could be a “sell the news” event when they do.

Let me reiterate something I wrote previously which I believe to be most important at this juncture:

“In 2008, when the Fed launched into their “accommodative policy” emergency strategy to bail out the financial markets, the Fed’s balance sheet was only about $915 Billion. The Fed Funds rate was at 4.2%.

, What The Fed Said, Didn’t Say, & What Happens Next

If the market fell into a recession tomorrow, the Fed would be starting with roughly a $4 Trillion balance sheet with interest rates 2% lower than they were in 2009. In other words, the ability of the Fed to ‘bail out’ the markets today, is much more limited than it was in 2008.

, What The Fed Said, Didn’t Say, & What Happens Next

“The critical point here is that QE and rate reductions have the MOST effect when the economy, markets, and investors have been “blown out,” deviations from the “norm” are negatively extended, confidence is hugely negative.

In other words, there is nowhere to go but up. Today, it is entirely reversed.

The extremely negative environment that existed in 2009, particularly in the asset markets, provided a fertile starting point for monetary interventions. Today, as shown in the table above, the economic and fundamental backdrop could not be more different.”

Lowering interest rates and quantitative easing are “incentives.” Incentives work when there is pent-up demand for a product, but are much less effective when everyone always has what you’re offering.  

Bill Bonner had the best explanation:

“Investors’ animal spirits were titillated brought last week by the Fed, which — in the wake of a deteriorating economy — seems ready to shift to Mistake No. 3 even before it has completed Mistake No. 2. 

You’ll recall that Mistake No. 2 is raising interest rates to try to mitigate the damage done by Mistake No. 1 (leaving rates too low for too long). Mistake No. 3 is dropping them too sharply to try to undo the damage caused by Mistake No. 2.”

, What The Fed Said, Didn’t Say, & What Happens Next

What Happens Next

We recently suggested this “sellable rally” had room to go into the end of this month. That still seems to be the most likely case. However, July through September are going to become much more difficult from both an earnings and economic perspective. 

, What The Fed Said, Didn’t Say, & What Happens Next

The red shaded bars denote the last two times that markets hit “all-time” highs coincident with an ongoing “sell signal” as denoted by the yellow circles. In both previous cases, the subsequent rally, while failing to hit new highs, almost reversed the sell signal before the markets turned lower again. While I am not suggesting that current market action will play out in the same fashion, it is worth considering before getting aggressively long-biased at this juncture.

More importantly, just about every other major index is NOT CONFIRMING the S&P 500’s new highs. Small, Mid, International, and Emerging Markets are all suggesting that something isn’t quite right, and even the “tech heavy” Nasdaq has failed to set new highs so far.

, What The Fed Said, Didn’t Say, & What Happens Next

So, what is pushing the S&P 500 index to new heights. It has primarily been the rotation into “defensive positioning,” which also suggests a “risk off” mood by investors. (This rotation is something we recommended to our clients in Mid-may.)

, What The Fed Said, Didn’t Say, & What Happens Next

The risk is that the current breakout is another failed attempt in this 18-month long consolidation process. The chart below shows a more concerning backdrop. As noted above, it is when the 10-year less the 2-year yield spread starts to increase, combined with a monthly “sell signal,” which as denoted major turning points in the market. 

, What The Fed Said, Didn’t Say, & What Happens Next

Therefore, we don’t recommend buying the breakout just yet.

Why aren’t we getting more bearish in our positioning? 

Simply because the market has done nothing wrong as of yet.

If the market can breakout, and confirm new highs, then a push towards 3100 is likely.

However, such a move would only likely be temporary and would only serve to further inflate current overvaluation and extensions of the market. Such will exacerbate the expected decline in late summer and early fall.

We suggest maintaining a long-equity base in portfolios, but continue to carry both higher levels of cash and hedges against a pickup in volatility. (We added Gold and Goldminers a couple of months ago for this very reason.)

Stay long for now, but I would not get too comfortable.

If you need help, or have questions, we are always glad to help. Just email me.

See you next week.

Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

S&P 500 Tear Sheet

   , What The Fed Said, Didn’t Say, & What Happens Next

Performance Analysis

, What The Fed Said, Didn’t Say, & What Happens Next

Technical Composite

, What The Fed Said, Didn’t Say, & What Happens Next

ETF Model Relative Performance Analysis

, What The Fed Said, Didn’t Say, & What Happens Next

Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels


, What The Fed Said, Didn’t Say, & What Happens Next

Improving – Healthcare

After having lagged for the last couple of months, our overweight bet on “healthcare” has begun to pay off as the anticipated rotation OUT of the previous leaders of Technology and Discretionary led to buying of underperforming assets like Healthcare. Stay long for now. 

Current Positions: Overweight XLV

Outperforming – Staples, Communications, Financials, & Utilities

As noted last week,

“Technology, Discretionary and Communications are on the verge of turning from outperformance to underperformance of the S&P 500 on a relative basis. While the rally in the market, as we discussed last week, continued for a second week in a row, it has been defensive positioning continuing the outperformance.” 

That rotation occurred this past week as our overweighted positions in Staples and Utilities continued to lead as money chased defensive sectors. We are maintaining our target portfolio weight in Financials for now. Take profits and rebalance across sectors accordingly. 

Current Positions: Overweight XLP, XLU, Target weight XLF

Weakening – Technology, Discretionary, Real Estate, Industrials

Real Estate has continued to attract buyers particularly as interest continue to weaken. Performance improved again this past and Real Estate will likely move back into outperformance next week. We continue to carry our current weight in Real Estate, we also added to agency REIT’s to out equity portfolio last week. We continue to looking for opportunities to overweight the sector. Industrials bounced this past week, but their relative performance continues to drag. We remain underweight industrials currently. 

As noted above the previous “leaders” are now lagging in terms of relative performance. Pay attention as this does not suggest the current breakout to new highs in the S&P 500 is sustainable. 

Current Position: 1/2 weight XLY, Reduced from overweight XLK, Target weight XLRE, 1/2 weight XLI

Lagging – Energy, Materials

This economically sensitive sectors have held up okay this past week but continue to lag on a relative performance basis. For now, we are maintaining our “underweight” holdings in both energy and materials until the “trade war” with China passes.

Current Position: 1/2 weight XLE, XLB

IMPORTANT: The oversold condition that existed at the beginning of June has been fully reversed back to an extreme “overbought.” Take some action to rebalance portfolio risk if you have not done so previously.

We may have some follow through rally this week, but use any further rise to take action accordingly. 

Market By Market

, What The Fed Said, Didn’t Say, & What Happens Next

Small-Cap and Mid Cap – While Mid-cap did break above it’s 50-dma this past week, it is still confined to an overall downtrend and not confirming the recent highs in the S&P 500. Small-cap continues to perform even worse, which is logical, given its sensitivity to weaker economic environments. We will need to patient to see if there is any follow through. As noted, these sectors are mostly tied to the domestic economy and their lack of performance is concerning relative to the economic backdrop. 

Current Position: No position

Emerging, International & Total International Markets

Both emerging and industrialized markets popped last week on rumors of more QE and lower interest-rates from the ECB. We were previously stopped out of our positions but will look to add some weight back to portfolios if the recent move back above the 50- and 200-dma can hold. 

Current Position: No Position

Dividends, Market, and Equal Weight – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with respect to economic growth and inflation. Currently, the short-term bullish trend is positive and our core positions are providing the “base” around which we overweight/underweight our allocations based on our outlook.

The rally over the last three weeks has fully reversed the previous oversold condition. Make sure and rebalance weightings in portfolios if you have not done so already.

Current Position: RSP, VYM, IVV

Gold – With rates dropping sharply and deflationary pressures on the rise, Gold finally got a bid over the last couple of weeks. Last week, the Fed’s comments on potentially cutting rates sent both Bonds and Gold soaring higher. Gold has provided a good hedge in our portfolios against the recent decline and a breakout above current levels would suggest substantially higher prices. 

Current Position: GDX (Gold Miners), IAU (Gold)


As noted above, Bonds soared higher last week on comments from the Fed which suggest the economic backdrop is much weaker than many believe. Bonds are EXTREMELY overbought, take some profits and rebalance weightings but remain long for now.

Current Positions: DBLTX, SHY, TFLO, GSY, IEF

High Yield Bonds, representative of the “risk on” chase for the markets rallied sharply with the market this week as “shorts” were forced out of their holdings. Not surprisingly, the “junk” rally has taken the market from oversold back to extremely overbought. Given the deteriorating economic conditions, this would be a good opportunity to reduce “junk rated” risk and improve credit quality in portfolios. 

IMPORTANT: The oversold condition has been fully reversed. Take action if you have not done so.

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

  , What The Fed Said, Didn’t Say, & What Happens Next

Portfolio/Client Update:

No change this past week. Despite the market testing highs, as noted in the main body of this missive, it is NOT confirmed by other major markets. Also, with the yield spread widening in conjunction with a monthly “sell” signal, historical outcomes for excessive risk exposure have not been kind. 

HOWEVER, with that said, we do realize markets are rising and that we need to take in participation when we can. Therefore, we will opportunistically look for areas we can add money too to participate without taking on excessive risk. As noted at the beginning of May. we have shifted our focus from “risk taking” to “risk control.” “Capital preservation strategies” now replace “capital growth strategies,” and “cash” now becomes a favored asset class for managing uncertainty. Such remains the case again this week. 

There are indeed some short-term risks in the market as we head into summer, so any positions added to portfolios in the near future will carry both tight stop-loss levels and will be trading positions initially until our thesis is proved out. 

  • New clients: Our onboarding indicators have reversed back to “risk on” so new accounts will be onboarded selectively into their models where risk can be controlled. Positions that were transferred in are on our global review list and being monitored. We will use this rally to liquidate those positions to raise cash to transition into the specific portfolio models.
  • Equity Model: No changes this past week. 
  • ETF Model: We overweighted our exposure to defensive areas by adding Real Estate and overweighting Staples and Utilities. We are looking at adding an agency REIT ETF (REM) to our portfolios in the coming week as we did with the equity portfolio. 

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging, if the market environment changes for the worse.


A Conservative Strategy For Long-Term Investors

, What The Fed Said, Didn’t Say, & What Happens Next There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

, What The Fed Said, Didn’t Say, & What Happens Next

Will New Highs Stick

I encourage you to read the main body of this week’s missive. 

However, in a nutshell, while the S&P 500 hit new highs this past week, all of the other major markets didn’t, including the technology heavy Nasdaq which has led the market all year. Leadership is important. 

While the breakout to new highs on Thursday was positive, we will need to see them hold through next week before considering taking on additional risk exposure. 

July and August tend to be challenging months for the market, so we want to be careful, particularly with the economic backdrop weakening and bond yields dropping so sharply. 

Take the following actions on Monday.

  • If you are overweight equities – take some profits and reduce portfolio risk on the equity side of the allocation. Raise some cash and reduce equities to target weights. Have a plan in place in case new highs fail to hold.
  • If you are underweight equities or at target – rebalance risks, look to increase cash rather than buying bonds at the moment, and use the current rally to rotate out of small, mid-cap, emerging, international markets. 

Lastly, the markets are back to extremely overbought conditions, this is a good time to take some action and clean up areas of your portfolio which have not been performing well. 

If you need help after reading the alert; don’t hesitate to contact me.

401k Plan Manager Beta Launch Coming

Thank you for all the emails of plans. We have been imputing them into the 401k plan manager (we are going to roll out the beta shortly with a few samples for testing purposes.)  We are currently covering more than 10,000 mutual funds initially, and are adding ETFs and Stocks hopefully in time for the beta test.

Our “live” 401k plan manager which will soon be available to RIA PRO subscribers for the beta test.

Once we have the bugs located, we will roll it out to new users. If you want to be part of the beta, you can subscribe to RIA PRO and get your first 30-days free. You will be able to compare your portfolio to our live model, see changes live, receive live alerts to model changes, and much more. 

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

I have gotten quite a few plans, so keep sending them and I will include as many as we can. 

If would like to offer our service to your employees at a deeply discounted corporate rate please contact me.

Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

, What The Fed Said, Didn’t Say, & What Happens Next

Talk with an Advisor & Planner Today!


Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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