The Federal Reserve said growth is bouncing back and the job market is improving as it continued to reduce the monthly pace of asset purchases.

“Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Federal Reserve Chair Janet Yellen said at a press conference in Washingtontoday following a meeting of the Federal Open Market Committee. Even with declines in unemployment, “a broader assessment of indicators suggests that underutilization in the labor market remains significant.”

The FOMC trimmed bond-buying by $10 billion for a fifth straight meeting, to $35 billion, keeping it on pace to end the program late this year.

Yellen and her fellow policy makers are debating how long to keep interest rates near zero as the U.S. labor market improves and inflation moves closer to the Fed’s 2 percent goal.

The policy-making FOMC repeated today that it’s likely to “reduce the pace of asset purchases in further measured steps” and that it expects rates to stay low for a “considerable time” after the bond-buying ends.

David Fuller's view

Plenty of US value investors are worried about the US stock market, because the S&P 500 Index is trading at a trailing p/e of 17.89 and yields 1.91%, according to Bloomberg.  True, this is no longer cheap but it is not seriously overvalued given the tailwind of monetary accommodation in the form of those record low interest rates.

The Nasdaq Composite Index remains considerably more expensive with a p/e of 34.45 and yield of 1.30%.  The Russell 2000 Index is not cheap with a p/e of 21.14 and yield of 1.38%.  Some value investors are also concerned about the outlook for corporate earnings, given the US economy’s slow rate of GDP growth.

So what is the outlook for the US stock market?

I maintain that the bull market is maturing, although there is no technical evidence that it is over.  The indices above did face a test in May, especially the Nasdaq Composite and Russell 2000, but the range lows broadly held, as did support near the 200-day moving averages shown above. 

Some US investment managers have long worried about the slow rate of GDP growth.  However, this is typical following a severe credit crisis recession, as I have maintained for several years.  If corporations and consumers deleverage, and government tax revenues decline as we have seen, economic growth will be slow for at least five years and probably longer as we are seeing.

However, corporations are doing much better, particularly the large, multinational Autonomies that Fuller Treacy Money often discusses.  These firms deleveraged very quickly following 2008.  Low interest rates have helped them to reduce debt burdens.  They are the leading beneficiaries of the accelerating rate of technological innovation, which the USA is actually leading.  Corporate earnings, on average, have been much stronger that GDP.  They have also been flattered by corporate share buyback programmes. 

None of this will prevent the long overdue ten percent plus correction that we have not seen during the last two years.  We will probably see it this year, and a spike in oil prices due to turmoil in the Middle East would certainly trigger a significant reaction.  Meanwhile, we have seen rotational corrections in many individual shares that had become obviously overextended relative to their MAs.  These have often been in excess of ten percent, and considerably more for momentum plays in previously fashionable shares such as ‘new tech’ and biotechnology.

Janet Yellen made some reassuring comments today, as you can see in the Bloomberg report above.  She also issued a mild caution: Yellen Says Low Volatility a Worry If It Induces Risky Behavior.  That is a truism; Yellen and her colleagues at the Fed want the stock market to remain firm, so they continue to provide a ‘sweet spot in terms of monetary policy, but the do not want to see a bubble.  That is unlikely at this time, given the firming of Brent crude oil and the psychological 2000 level which the S&P 500 Index is approaching.