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Evgeni Tcherkasski Bfbhwj4Qafo Unsplas
05.01.2022
Don't fear the Fed (yet)
The explanation from mainstream media is that higher bond yields were behind yesterday’s equity wobble. That narrative is widely used post fact to justify price action. But markets are complicated, relationships change & it is lazy thinking to constantly rely on perceived truisms.
Qi’s Long Term model for the S&P500 remains below the key 65% confidence threshold, but the Short Term model has been in a strong macro regime since October. Model confidence is currently 78%.

We always default to the Long Term model with its rolling 12mth look-back period. Relationships are more stable, valuation signals typically back-test better. But, in a more tactical market, there will be times when the shorter 4mth rolling window, can offer value.
Screen Shot 2022 01 05 At 090927
The ST regime is show above (click chart to expand). It is a Goldilocks scenario – reflation plus tight credit spreads & healthy risk appetite. But the biggest standout is the relationship with the Fed’s monetary policy stance.

Both Fed rate expectations & QT expectations are positive drivers. On current patterns, rate hikes & QT are consistent with higher S&P500 – they reflect a healthy underlying economy that is comfortable with policy normalisation.

These relationships could change again. At the factor level there will be a tipping point where a higher terminal rate &/or faster pace of hikes become equity negative. Qi would capture that via S&P500 sensitivity to Fed rate expectations (the shape of the Euro$ curve) flipping from positive to negative.

Real time, quantitative tracking of critical shifts in macro relationships. Lazy narrative versus robust process.
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