An Oddity with Potential

A Fed ease could unleash a plethora of stock market supports finally bringing new leadership and elongating this bull run perhaps for much longer than most now anticipate.

In every bull market, there are things which are a bit odd. Such oddities need to be investigated so investors can understand whether a return to normal can be expected or whether the newfound oddities will persist. Oddities often gain attention when long-standing relationships break like yield curve inversions that no longer signal recessions, government debt to GDP ratios which surge beyond 100%, bond yields which actually turn negative, or when the aggregate U.S. market cap to GDP ratio breaks above 200% and the stock market just keeps climbing.

Sometimes oddities can be colossal like the Great Depression of the 1930s, runaway inflation in the 1970s, or the largest ever single-day 20%+ stock market collapse which occurred in 1987. Other times they are more subtle like the shift from a goods-producing to a service-producing U.S. economy, slowly aging demographics, partisan political shifts, the deliberate emerging impact of AI, and an inexplicable upward trend in the stock market’s valuation after more than a century of a stable range. Finally, there are oddities which prove transitory like emotional stock market fads (e.g., the nifty-fifty run in the early-1970s, energy stocks in the late-1970s, and tech stocks in the 1990s), world wars, terror attacks, pandemics, and tariff wars.

Oddities can be frightening and certainly frustrating, but they also represent opportunities with potential. If an investor can recognize and correctly assess how an oddity may play out -- as either transitory or permanent -- they can position appropriately and improve their portfolio risk-reward profile. While there are arguably several significant oddities today, in my view, the contemporary oddity with the greatest near-term potential may be monetary policy.