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

NEW YORK (TheStreet) -- Last Thursday, the S&P 500 index closed at a record high of 1,992.37. By Monday morning, the index touched the 2,000 mark. In between, investors heard from the Fed.

On Friday, Janet Yellen spoke at the annual Jackson Hole conference sponsored by the Federal Reserve Bank of Kansas City. Yellen's speech was much-anticipated as a possible guide to the thinking going on within the Board of Governors of the Federal Reserve System about the state of the economy and when -- not if -- the Fed will begin to raise short-term interest rates.

The S&P 500 stock index closed on Friday evening at 1,988.40, down 3.97 points for the day. Much discussion took place over the weekend about the meaning of the speech and what it meant for the future of Federal Reserve policy.

By Monday morning, one could reach the conclusion that Yellen had given a bravura performance of "Fed-speak" worthy of former Fed Chairs Paul Volcker and Alan Greenspan. That is, Yellen said a lot in her speech -- and gave away very little.

The highlight of Yellen's speech: "Our assessments of the degree of slack must be based on a wide range of variables and will requires difficult judgments about the cyclical and structural influences in the labor market.... While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession."

After a weekend trying to decipher statements like these, investors moved the S&P 500 upwards over 2,000, a new all-time record, soon after 10:00 a.m. Monday morning.

TheStreet's Jim Cramer says it's Mario Draghi that helped push the S&P past 2,000:


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The guiding principle behind this move: don't fight the Fed.

This has been the investor's mantra throughout this period of quantitative easing, as the stock market has almost continuously reached for new highs. And, the speech given by Yellen has apparently not changed anything.

Although the third edition of quantitative easing is ending in October, the general market consensus is that the Federal Reserve will not begin to raise short-term interest rates until the middle of 2015. Although there has been a lot more hawkish talk by some Fed officials about raising rates sooner in the press these days, Yellen and other officials still seem to be maintaining this view and have reinforced the general market consensus.

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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