Fed Policy Risk in U.S. Stocks Seen Years Away: Chart of the Day

The Federal Reserve might be years away from bringing an end to the current bull market in U.S. stocks, according to Jeffrey Kleintop, LPL Financial Corp.’s chief market strategist.

The CHART OF THE DAY illustrates how Kleintop reached his conclusion, presented in a midyear report. He compared the gap in yield between 10-year Treasury notes and three-month bills with the performance of the U.S. economy and the Standard & Poor’s 500 Index.

Since the 1960s, stocks consistently dropped around the time of “yield curve inversions,” Kleintop wrote in the June 30 report. Inversions occur when the 3-month yield exceeds the 10-year yield, typically because of changes in Fed policy. He estimated that the next one may occur in 2017 at the earliest, based on interest-rate forecasts of the Fed’s voting members.

“The best indicator for the start of a bear market may still be a long way from signaling cause for concern,” the Boston-based strategist wrote. His report had a comparative chart going back to 1968.

When the Fed starts to lift rates matters less than how much the cost of money rises, Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, wrote yesterday in a report with a similar chart. Last month, St. Louis Fed President James Bullard said he favors a first-quarter increase to the central bank’s benchmark rate.

“Equity investors should focus on the shape of the yield curve” and not the target rate, the New York-based strategist wrote. He sees the S&P 500 ending the year at 2,075, the third-highest projection among 19 strategists surveyed by Bloomberg.

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