Moreover, we think we are still several years away from full monetary normalization. After tapering ends, the Fed will likely wait some time before it starts to raise short-term interest rates. Last time we were in this position (in 2013), it was two years before the Fed began to increase interest rates, which took place over a four-year horizon. Former Fed Chair William McChesney Martin famously quipped that the job of the Federal Reserve is "to take away the punch bowl just as the party gets going." We don’t think the current Fed is going to take away the punch bowl anytime soon, and expect it will remain accommodative for the foreseeable future.
Bear Argument #5: The White House Agenda Will Derail The Bull
We don’t think Washington policy developments are a serious threat to broad markets in the near-to-medium term. We know that people get passionate about policy and that’s a good thing—that’s what makes a democracy go. But a direct connection between policy and broader market direction is rare. Even when it comes to the narrow impact of policy on an individual sector or industry, the outcome for markets may not be in line with what conventional wisdom expects—or may be overwhelmed by larger economic forces.
Policy does matter, but unless there’s a glaring mistake, it’s unlikely to be a policy decision that takes the bull market down. President Biden’s agenda is likely a mixed bag for markets. Markets tend to respond positively to stimulus, and we believe we may see a total of $2–2.5 trillion in new spending, spread out over about 10 years, passed by the end of the year. But higher taxes could be a headwind, and that additional spending may be paid for, in part, by $1–1.5 trillion in new taxes, the rest coming through borrowing. But either way the primary driver of the recovery will continue to be businesses looking for better ways to compete, innovate, and grow. That’s a powerful force, and market history says compared to that what happens in Washington is usually not enough of a catalyst to reverse market momentum.
Conclusion
LPL Research continues to believe that tactical investors should tilt portfolios in favor of stocks over bonds. This certainly does not mean that an exogenous shock could not cause stocks to correct. However, when looking at the recent pace of earnings, the policy environment and market history, we fail to see a compelling bear case against equities.
Ryan Detrick is chief market strategist for LPL Financial.