On January 22 I posted a blog arguing that the stock market might not have been over-valued as many commentators at the time thought. (See: https://shulmaven.blogspot.com/2020/01/a-rational-basis-for-supporting-todays.html) By mid-March I looked a complete idiot as the the COVID-19 pandemic crashed the market. With that the Fed came out with guns blazing and rescued the market from an abyss that many feared. Since then the stock market rallied by more than 50% making new highs.
Today Fed Chairman Jerome Powell in announcing new policy procedures ratified the advance and then some. The new procedures did three things:
1) Buried the Phillips Curve which means the Fed will now be concerned only with "shortfalls" in employment and won't worry about exceptionally strong labor markets unless inflation was a clear and present danger.
2) This means that the Fed won't act preemptively to prevent inflation. In a nutshell good news for the economy is good news for the stock market; a huge boon for cyclical stocks. In other words interest rates will be lower for longer.
3) The Fed's 2% inflation target will represent a multi-year average of inflation, not a specific point in time target. As a result the Fed will not be concerned from what it perceives to be a temporary period of say 2.5%-3% inflation. In a zero nominal rate environment the real Fed Funds rate could be -3%; an extraordinarily bullish environment for stock prices and yes, gold.
Thus if we assume a reasonable economic recovery over the next two years that would bring S&P 500 earnings to around $180 one can visualize a S&P value of between 4000-4500, implying a PE ratio in the range of 22X-25X. The one fly in the ointment would be a resurgence in inflation which would put a kibosh on the Fed's zero rate policy. The bond market sensed that today with 10-year Treasuries rising from .68% to .74% and 30-year Treasuries rising from 1.42% to 1.50%.
In the meantime the Fed has green lighted the stock market.
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