And the heart of that story is a significant shift coming in monetary policy. Quantitative easing is going to end next month when quantitative neutrality begins. It’s a significant change by the Fed. And on a de facto basis, it represents a relative tightening.
Traders and investors are fighting like cats and dogs over the meaning of the Fed’s policy. They shouldn’t be. The handwriting is on the wall. And Bernanke’s less-accommodative stance — what I call quantitative neutrality — is bullish for the dollar, bearish for commodities, and is leading to a stock market sector rotation of the major groups, away from energy and raw materials and toward more defensive plays like health care, utilities, and consumer staples.
Now, strong profits provide a good backdrop for the change in Fed policy and the rotation shift in the stock market. Profits will cushion whatever stock corrections are out there.
And, let’s face it, with a zero interest-rate target and a negative real fed funds rate, the Fed will still be highly accommodative.
But my point is, going from quantitative easing to quantitative neutrality is a less-accommodative Fed. I think it puts a floor under the dollar and a ceiling over most commodities. And this change from the Fed is the main source of the volatility that we are witnessing.
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