David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

Can You Say, Dovish?

Obviously, the key to yesterday’s joyride to the upside, which saw the S&P 500 surge nearly 46 points (or 2.22%) in about an hour and both the smallcap and midcap indices vault to new all-time highs, was the Fed statement. Obviously, traders liked what first the FOMC and then Ms. Yellen had to say about the state of the economy and the outlook for monetary policy. And obviously, the Fed remains the driver to this market.

However, at this stage of the game, with the stock market overvalued by most measures and concerns mounting about the state of corporate earnings, it is important to understand why exactly the market blasted higher yesterday.

Within seconds – no, make that, milliseconds – of the release of the FOMC statement, everybody on the planet knew that the Fed had dropped the word “patient” from their forward guidance language relating to monetary policy. To be sure, this was expected. The question of the day then was what tone the statement would take and if the FOMC would provide any hint as to when rates could be expected to be lifted.

We Expected Tough Talk…

To be honest, we expected the Fed to “talk tough” yesterday. We expected Ms. Yellen to ignore the recent punk data and effectively put the markets on notice once and for all that the FOMC would raise rates whenever it was appropriate. Looking at the situation logically, this would help the Fed gain credibility and allow Ms. Yellen’s merry band of central bankers some flexibility going forward.

We also expected Ms. Yellen to avoid providing any details in her prepared remarks during the ensuing press conference and then to keep her cards very close to her vest when the Q&A session began. And as a result of this, we felt that there was a decent chance that stocks could sell off on the idea that the Fed really meant what it said this time.

But Instead…

But instead of talking tough, the bottom line is that both the FOMC statement and Ms. Yellen’s remarks came in MUCH more dovish than had been anticipated and stocks quickly (very quickly) went on a tear to the upside in response.


S&P 500 – 1 Minute 


There were really three key takeaways from yesterday’s FOMC meeting and Ms. Yellen’s presser.

First, the FOMC made it very clear that they were now data dependent and that the committee could begin raising interest rates at ANY time going forward. Normally, this would have likely spooked the market a bit.

However, after that, the Fed then went on to basically downgrade their view of the economy. You probably don’t care about the exact verbiage used, but it will suffice to say that the FOMC did in fact acknowledge the recent string of punk data.

Ms. Yellen even went so far as to say that in its estimation, the FOMC believes that the economy has not yet met the objectives set to trigger the first rate hike.

The third key came seconds into the Chairwoman’s prepared remarks during the press conference. With what appeared to be a wry smile and a twinkle in her eye, Ms. Yellen stated that removing the word patient from the FOMC statement does not mean that the Fed will be “impatient” moving forward. Can you say, “dovish?”

And then with Ms. Yellen failing to stumble or be tripped up by the questions asked in the press conference, traders came to the conclusion that the Fed is NOT going to raise rates in April and in all likelihood, the Fed is NOT going to begin the long-awaited rate hike campaign in June either.

And based on the fact that Ms. Yellen suggested that the jobs market isn’t good enough yet, analysts were forced to consider the possibility that there may not be any rate hikes in 2015 at all – unless, of course, the jobs market continues to improve, or if inflation and/or the economy perks up a bit.

Party On Wayne

So, with the ECB having launched its new QE program, in which it will spend €60 billion a month for 19 months, China talking stimulus, and now the Fed looking like it will remain friendly for some time yet, it appears that the “liquidity trade” remains firmly in play. Party on, Wayne!

Does this mean that stocks will simply continue to skyrocket going forward? Well, not exactly. You see, stocks remain overvalued and there is a fair amount of concern about the dollar’s impact on earnings. Oh, and the sellers did indeed come in hard when the NASDAQ once again briefly breached the 5,000 mark yesterday afternoon. So, it looks like the game to sell into all new highs is still in play.

No, in my humble opinion, what yesterday’s Fed adventure means is this… Given that the globe’s central bankers remain friendly stocks are unlikely to come unglued in the near future. Sure, the market could experience any number of 3% to 5% corrections and maybe even something a bit more meaningful if earnings start to stink up the joint. However, a severe decline appears to be unlikely while the Fed is friendly, the economy is improving, and the rest of the world is printing money.

Turning to This Morning…

The big story overnight remains the Fed’s surprisingly dovish stance at yesterday’s FOMC meeting. The key appears to be that a June rate hike, while possible, is not probable at this stage. A Reuters poll showed that 12 of 16 primary dealers surveyed now expect the rate liftoff to begin in September or later. Just four are now looking for an initial tightening in June, which is down from nine earlier this month after the second consecutive upside surprise in nonfarm payrolls occurred. In other news, Greece is back in the headlines ahead of yet another EU summit. Finally traders will continue to watch the data in the U.S. as well as the action in the dollar and oil pits. Currently stock futures are pointing to a pullback at the open on Wall Street.



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