This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

What the Fed Is Watching

Stocks in this article: GLD TIP IEF

NEW YORK ( TheStreet) -- Risk-asset markets experienced their first bout of volatility this week, which had been largely absent for a better part of the year.

The two strongest underlying factors that have been driving up equity markets have been central bank liquidity and the strength of corporate earnings.

But now, corporate earnings reports are mostly done for the quarter, which leaves central bank aid as the lone support system. Although economic data have trended higher, data releases remain volatile from one month to the next.

After Federal Reserve Chairman Ben Bernanke spoke last Wednesday and introduced uncertainty about the continuation of quantitative easing, equity markets began pulling back.

In an effort to calm market fears, Federal Reserve governors came out on both Thursday and Friday to clarify that quantitative easing would not be reined in in the short term.

Inflation must tick higher, and unemployment, as well as the labor force participation rate, must improve before the Fed deems the economy healthy enough to operate on its own. The indicators below show that monetary policy is not likely to be tightened in the near term.

The first chart is of Barclays TIPS Bond Fund (TIP) over Barclays 7-10 Year Treasury Bond Fund (IEF). This pair measures inflation expectation, and correlates strongly to CPI readings.

The chart is nearing yearly lows, indicating that the market does not fear rising inflation. As long as the indicator remains at suppressed levels, the Fed will take this as a sign for further action. An improved economy will bring about higher inflation expectations, which in itself should be a virtuous circle of improvement.

The next pair is SPDR Gold Trust (GLD) over the DB Commodity Index Tracking Fund (DBC).

This pair measures the relative strength of gold vs. the broader commodities sector.

Gold is an inflation hedge that acts as a substitute to paper assets. When inflation is no longer a concern, hedging becomes less of a necessity. The pair has broken lower in recent weeks to a multiyear trough.

Investors in other countries, whose currencies are currently being devalued, are actively choosing to hedge their currencies' weakness by buying dollars. If your currency is being devalued against the dollar, then why not buy the dollar, and invest in U.S. equities? As the dollar continues to strengthen and equities keep their status as the most attractive asset class, gold will be persistent in its decline.

The last pair is Total World Stock Index ETF (VT) over the SPDR Gold Trust. This chart measures investors' attitudes in the battle between world equities vs. gold.

As central banks have actively devalued their currencies beginning in late 2012 and inflation has become less of a fear, equities have drastically outperformed gold.

Hedging weaker currencies by buying the dollar, as well as investing in equities, has pushed this pair higher. As long as monetary policy remains accommodative and inflation fears are subdued, risk assets should continue to outperform.

At the time of publication, Sachais had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs