I had the good fortune of playing golf in the NV5 Invitational Pro-Am yesterday. I was with good friends from college & we were paired with a different pro on the front 9 & back 9 . However, the conversation was easy & fun was abundant with the pros joining in the good time

Clearly there were good vibes as each pro holed out for eagle on the way to us being tied for first at -19. Unfortunately we lost in a scorecard playoff & took home the 2nd place trophy. However, we will surely be back next year to defend & to get more of the good vibes

The market was definitely feeling good vibes after the FOMC meeting yesterday. Forget any sense of hawkishness that had crept in ever so slightly. JayPo & team delivered the dovish hike that bulls were hoping for

We are at Peak Fed again & this came out in the rally in stocks, rally in credit & sell-off in the dollarThe earnings news from the likes of META only seal the deal that a soft landing is here & there is nothing to fear

I know from a few conversations yesterday, the FOMO is very real and while 5.5% is nice in cash, many see the 20%+ returns in stocks & feel left out

One comment from the press conference struck me. JayPo said "The federal funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, then we don't need to be at a restrictive level anymore."

This sounds like "Mission Accomplished" to me but it was the green light to take risk because it sounds like cuts sooner than later to most who are extrapolating recent declines in the CPI further into the future

I took a look at what restrictive meant & what that could signal. I took a very simple approach & looked at CPI less Fed Funds. Restrictive would mean Fed Funds > CPI. Easy would be the opposite. I plotted this difference vs. yoy SPX returns and yoy changes in GDP

I circled the times the policy was restrictive this century, when Fed Funds were greater than CPI. We can see that policy has a lagged effect of about a year. However, after policy goes restrictive, yoy changes in SPX go negative & then GDP goes negative too

However, this time is different. As policy is the most restrictive since pre GFC, stocks are rallying sharply. GDP has yet to waver but it is also the most lagging of data. Think of this when it is reported this week

Restrictive policy means businesses will be unable to afford or even get loans. Growth won't collapse immediately, but eventually this slowing will show up in the data, both economic data & stock earnings

However, for now, FOMO is very real & Peak Fed means Peak Risk-taking. I understand the behavioral impulse here. As a PM or advisor you can't be in cash in one of the stronger mkts this century. That is a good way to lose your job

Yet policy is restrictive & both theory & history tell us this means tougher times ahead. What do you think?

Stay Vigilant

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