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'Don't Fight the Fed' Is Investors' Takeaway From Jackson Hole Conference

The hawks within the Fed are concerned that all of the liquidity pumped into the financial system will eventually end up producing a period of more rapid inflation that will put pressure on the Federal Reserve to reverse gears and keep prices from rising excessively. The historical record is that excessive monetary growth always translates into excess price increases at some time in the future.

The other concern floating around is that the stock market is experiencing a bubble created by the easing monetary policy -- and that it will one day burst. A leading indicator of this possibility is the statistical measure called the Cyclically Adjusted Price-to-Earnings ratio or CAPE, created by economics Nobel Prize-winning economist Robert Shiller.

Right now, the CAPE measure is above 25. Its historical average is slightly above 15. Shiller's argument is that CAPE eventually reverts back to its mean. He is very careful to say that the timing of the reversion to the mean is ambiguous and the measure can remain above or below the mean for a considerable period of time.

The point is that at some point in the future, the CAPE measure will revert to its mean.

But the argument still holds that investors should not fight the Fed. And this is currently what is being translated into the stock market. The events at Jackson Hole did alter investor expectations.

The concerns expressed by the hawks at the Fed and by Shiller should not be dismissed, however. As long as Federal Reserve actions can be interpreted as supporting the current view that short-term interest rates will not begin to rise until the middle of 2015, investors can take advantage of the run-up in the stock market. Just be prepared to stay nimble.

At the time of publication, the author held no positions in any of the stocks mentioned.

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

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