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July 28, 2016 By Peter Boockvar

Market response to FOMC, Atlanta Fed, BoJ

TINA (‘there is no alternative’ to stocks which there never is in a bull market) and the dividend yield on stocks being higher than many bonds are the two main reasons being given for the persistent strength in large cap stocks. I don’t mean to pick on any one company but I want to use one as an example that if you’re going to ‘search for yield’ in stocks, remember that the potential for capital loss should be part of the analysis as it’s not just all reward. If one bought Equity Residential, the large apartment REIT on Monday because the 2.9% yield was so compelling relative to the 1.55% 10 yr bond yield, the stock lost 5.5% yesterday after a disappointing earnings report. Stocks are riskier than bonds as we all know and therefore comparing bond yields and dividends is an apples and oranges comparison. I’ll also ask this question, where is the historical study that shows a tight correlation with future equity returns when the earnings yield on the stock market is higher by a certain level against the risk free rate? There isn’t one because there isn’t a high correlation. Remember the Fed model? I found this chart from Mark Hulbert last week:

image003

My point is that the world’s central banks have no question left the investing landscape in disarray but I just wanted to bring some further perspective to some of the reasons some are giving to buy stocks as opposed to fundamental and valuation driven reasons.

The US market response to the FOMC statement was most interesting and confusing. The statement sounded a bit more hawkish as we know which I think was the right thing to do so as to give them flexibility. But, their game of day trading the data continues as they go back and forth depending what the monthly payroll numbers are. On one hand, the yield curve flattened further with the 2s/10s spread narrower by another 3 bps to just below 78 bps. On the other, the US dollar fell, gold rallied, stocks did nothing and the 2 yr yield still dropped. I think the real message is there are real global growth concerns and the belief that there is little chance the Fed hikes rates. Anecdotally, a major source of strength for the US economy over the past 5 years has been auto sales and Ford’s CEO today after the earnings release said he is expecting a y/o/y decline in retail in the 2nd half and said he can argue the SAAR for auto’s has peaked in this cycle.

Today, a day before we see the first look at Q2 GDP, the Atlanta Fed’s estimate today took a large 5 tenths cut to just 1.8% after seeing the advance trade and inventory data. Here is the link, //www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1. The consensus estimate for tomorrow prior to the new data today was at 2.6%. If the Atlanta Fed is correct (I emphasize IF), the first half growth rate would average just 1.4% and 1.6% over the past 4 quarters. Yes, I get the whole pile into anything with yield thing but the flattening of the US Treasury market is corroborating this slowing US growth trend.

The world of monetary madness now shifts to Japan and the yen rally and 1.1% fall in the Nikkei overnight just points to the jitteriness over what will be announced. The expectations bar is high but we should all expect only more of the same type of easing and please don’t expect a different result.

Filed Under: Central Banks, Latest Data

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About Peter

Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.

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Disclaimer - Peter Boockvar is an independent economist and market strategist. The Boock Report is independently produced by Peter Boockvar. Peter Boockvar is also the Chief Investment Officer of Bleakley Financial Group, LLC a Registered Investment Adviser. The Boock Report and Bleakley Financial Group, LLC are separate entities. Content contained in The Boock Report newsletters should not be construed as investment advice offered by Bleakley Financial Group, LLC or Peter Boockvar. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. The views expressed in this commentary should not be taken as advice to buy, sell or hold any security. To the extent any of the content published as part of this commentary may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. No chart, graph, or other figure provided should be used to determine which securities to buy or sell. Consult your advisor about what is best for you.

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