Stock Market Analysis: Will Janet Yellen Kill This Rally?

Stock Market AnalysisTo be candid, my stock market analysis continues to yield one overriding factor for this market—it’s all about the Fed. That’s it.

Chinese economic news matters increasingly, and Greece’s sovereign debt problems did affect sentiment. But make no mistake; U.S. equities are trading off monetary policy expectations and global “developments” will fall by the wayside as soon as Janet Yellen and the Fed move on rates (possibly in September).

The fact of the matter is that monetary policy is still favorable for equities, even if current financial results aren’t strong enough to support rising share prices.

But the stock market is all about the future and soft corporate results won’t derail investors’ affinity for betting on it.

Trading action has been lackluster since January. But it’s actually been a pretty decent year for the main market averages, considering where stocks have come from. This market could have easily experienced a 20% correction across the board considering where share prices have come from.

Stock Market Analysis: Will it Pay to Fight the Fed?

So will it pay off to fight the Fed? No; historically, it doesn’t pay for an equity investor to go against monetary policy.

Right or wrong, the institutional marketplace trades off it. Because institutional money is the driver of stock prices, consistently betting against it typically isn’t fruitful.

The current environment is somewhat unique in that near-zero interbank rates can rise quite a bit before the cost of (corporate) capital becomes materially onerous.

Therefore we have a situation where equity investor sentiment is becoming more positive on expected rate hikes. If the Fed feels that the U.S. economy can handle a few extra quarter points, the marketplace views this as a net positive.

What Companies Are Saying About Their Businesses

Corporate reporting has been soft the first half of this year. Currency translation is materially affecting international businesses. Mature economies outside the U.S. are producing virtually no comparable growth.

The market expected this. And late last year, expectations for corporate financial results came way down.

In slow-growth operating conditions, large corporations tend to under-promise in order to make it easier to over-deliver. And they have the cash to keep paying those dividends and buying back shares.

It’s the same strategy that’s worked for the last handful of years and I suspect it will continue to be a cornerstone business strategy for a lot of global businesses near-term. (See “6 Best Dividend-Paying Stocks to Watch in this Market.”)

Second-quarter reporting saw plenty of disappointments as well as confirmations regarding full-year 2015 outlooks. Additionally, forecasts for 2016 are holding up. It’s all fluid of course, but Wall Street sales and earnings estimates for a lot of brand-name companies forecast material growth next year.

Naturally, in a rising rate environment, stocks like utilities will come under pressure. The group already has. Debt refinancing has been robust, as companies are moving ahead of rate hikes.

Given current information, I think this market is setting itself up for a bit of a fourth-quarter rally, betting on stronger economic conditions in 2016.

It’s going to be an extended song and dance with the Federal Reserve as extreme monetary policy slowly unwinds.

Right now, stocks are likely to advance through the first couple of rate hikes. Even a slight uptick in corporate sales growth will translate materially to earnings.