Stocks, bonds and income vehicles are rising despite the daily onslaught of data that in most cases show a weakening economy. The Index of Leading Indicators has been falling month after month, existing home sales are weak, credit card debt is rising, there are layoffs announcements seemingly every week and often news about slowing manufacturing production and waning consumer and CEO confidence. With the exception of the January jobs and retail sales reports, just about everything points toward slowing growth in GDP.  

Not all the news is grim. As expected the CPI rate is edging down from a high above 9%. I expect the year-over-year CPI rate will fall to 4%, give or take, but not to the Fed’s 2% target. Inflation is stubborn, especially in the services sector, which is labor intensive. Commodity prices can fall quickly and retail prices decline along with them. Wages can’t.  

Recessions happen when the Fed wants them to happen. Because the M2 money supply has fallen for a year, which is extremely unusual, the Fed appears ready to fight inflation no matter the cost. The many Fed governors who give speeches every week say again and again that rates must go higher and stay there longer. So far equity investors don’t believe the Fed will follow through.

Still, very few analysts seem ready to say the bottom came last October and that we are in a bull market now. Today’s degree of pessimism about the economy and stock market has been seen before and stocks surprised the naysayers by doing well. Why? All the data I mentioned in the first paragraph and more I didn’t are well known to investors, professionals and individuals. Anticipation of data we are seeing now is why stocks fell last year. Investors are anticipating something else now, something better. They will be right. Don’t be surprised when that something appears.

What the Fed will do is a wildcard for the bulls. I have never taken their words at face value and don’t now. The market dictates to the Fed, not the other way around. Professionals are dismissing the Fed’s claim that rates have to go higher for longer. They don’t believe it. I don’t believe it either. Because of the lag between rate hikes and their effect on the economy, I believe the hike cycle is nearing an end. The Fed may have already gone too far. We will soon see.   

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.