Is the Fed triggering the next bear market?

October has been a rough month for the stock market with the recent downdraft wiping out index gains for the entire year. The deterioration has been rapid despite a strong earnings season and overall S&P earnings increasing by nearly 30 percent. It is highly unusual for earnings and stock prices to diverge to this extent. Something is obviously deeply troubling investors, and we wonder if the Fed is triggering the start to the next bear market?

Fed is tightening

At the end of an economic expansion, the Fed tightens monetary policy so the economy doesn't overheat. This time is no different. The Fed has hiked rates three times this year and is expected to hike one more time in December.

Furthermore, the Fed has been slowly reducing the size of its balance sheet by not re-investing bond maturities. Obviously, the Fed does not want to cause a problem. However, it should be noted that it is an grand and unprecedented experiment to shrink its $4 trillion balance sheet which was just $800 million in 2008.

Back in May, the Fed was allowing $6 billion of mortgage backed securities (MBS) and $4 billion of Treasuries to run off each month. The Fed will increase this every three months with a cap of $20 billion in MBS and $30 billion in Treasuries per month.

fed balance sheet 2018


Tightening into slowing growth

The market seems to be digesting the possibility of 4 more interest rate hikes in 2019 while the market had been pricing in roughly 2. Since the end of September, monetary policy expectations have tightened significantly as measured by Goldman Sachs (see chart below).

This tighter monetary policy is in the face of slowing growth in Europe and Asia. Despite this fact, the ECB recently confirmed its plan to end the ECB's 2.5 trillion Euro bond-buying program in December.

GS monetary policy


Repricing of assets

While we believe higher risk-free rates are great for savers, on a relative basis, the market has to reprice all risk assets. In simple terms, those that chased dividend yield stocks for 2-3% payouts in a zero rate environment can and probably will sell those same stocks to own a Treasury bill yielding 3% with no downside risk.

This is the second longest economic expansion on record. Being late in the cycle means that risks are on the rise. While we don't see any signs of economic weakness, monetary conditions are definitely tightening, albeit from extremely loose conditions, and should raise some caution with investors going forward.


Photo by Etienne Martin on Unsplash

Compared to a month ago, how is your market psychology? Are you more concerned, less concerned or feel the same?

Share This Story, Choose Your Platform!

About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Search Website

Annuity Review Database

Follow Our Podcast

Google Podcasts
Apple Podcasts

Recent Posts