Correlation moved to 1.0 across the spectrum of investment classes Tuesday, save bonds, thanks to the testimony of Janet Yellen before Congressional members. First and foremost, she reinforced equity investor confidence in the Fed. The market had become dependent and confident in Ben Bernanke, so any change would have been questioned.
Yellen confirmed that the transition would be continuous and that markets should note no difference in Fed flow. However, I have my doubts about how the Fed might function under a crisis of the sort Chairman Bernanke was thrown into. In those dark days, there was a moment when all the men in the room looked to Ben, and he basically led the country. I'm not sure Yellen, or any other Fed member for that matter, are as capable a leader, but hopefully the precedent set by Bernanke provided a model for future reference. Certainly, the Fed and government have set in place rules to prevent future crises, but crises have a tendency of coming in different forms.
Last 12 Mos.
SPDR S&P 500 (SPY)
SPDR Dow Jones (DIA)
SPDR Gold Shares (GLD)
iShares US Real Estate (IYR)
United States Oil (USO)
PowerShares DB US$ Bullish (UUP)
PIMCO Total Return ETF (BOND)
Stocks rose across the board Tuesday, but gold matched them; so what gives here? Well, it seems to me to also reflect market perception of Yellen. The market may be seeing and misinterpreting economic data as indication that Yellen could halt tapering in March. However, Fed Chair Yellen said the central bank would not react to the last two months worth of weak jobs data, and instead wait it out through the March monetary policy meeting. The reason was the same one that I recently cited, which is the likelihood of this winter's extraordinary weather affecting the economy. It's a temporary factor that means things should show better in a few months, and in some industries, be made up in spring. Even where sales are lost for good, for instance in retail, the forward economic repercussions are not sustained where companies can stay solvent.
So if the economy is okay, then stock investors can see value where before they saw pariah. With the Fed keeping to tapering though, bonds are right to retreat as interest rates remain more likely to increase than decrease. It is also possible that something else is driving gold, because if stocks are rising and the dollar is strengthening, gold should be backing down. I would have looked for bets against the China trade data as the catalyst, but that was just reported strong, with import growth touching a six-month high. Gold and the SPDR Gold Trust are higher today along with stocks again, so something else could be at play.
Gold is up this year, but it's still relatively cheap when matched against its peak. There are all sorts of geopolitical mines to mind as well, and those are partially behind the gains in both gold and oil of late. Syria remains as chaotic as ever if not deteriorating further. Iranian warships are headed toward the Eastern U.S. President Obama's issued strong words regarding Iran during the joint press conference with the French leader yesterday. Consideration should be given to the possibility that other capital intensive institutions or nations could be buying gold with foreknowledge of a geopolitical event, but this is an outlier obviously, and one that has existed dormant for a long while now.
In conclusion, the Yellen Effect is a good thing for investors of all sorts today, and it's being celebrated again this morning, with the SPDR S&P 500 higher off the open, though softening into the 11 AM ET hour. Fluctuation seems likely to me through the rest of winter, as I expect continued reported economic weakness on extraordinary weather to cause traders to second guess and stress. However, as spring approaches, investors will increasingly want to reconsider stocks and the SPY in my view, no matter what the Fed does.