If Hindsight Is 20/20, The Future Is?

I was supposed to be driving up to the Collingwood / Thornbury area today, but was warned off by the weather and highway driving reports (whiteouts). It got me thinking, because I am getting a sense that this is what central bankers are looking into at the moment.

Suffice it to say, the picture out the front window is not all that clear. History will tell us that the U.S. Federal Reserve has raised interest rates and caused recessions 13 times since 1950 (that is one pretty interesting statistic on their forecasting abilities). This is then followed by a need to lower interest rates (and usually rather quickly), but it is usually too late for the economy (hence the ensuing recessions).

Most recently this happened in 2007. We all know what followed.

Stock markets get excited to see the Fed (or the BOC, for that matter) change the tune. However, the less exciting /excitable and more rational bond markets (which do lead all financial markets) look at it as a grim reality.

Stock markets that trade off of last quarters earnings are stuck in "hindsight" mode. Hoping that the end of interest rate increases will draw stock market happiness is the very thing that will help the sellers, loudly touting the re-kindling of the bull-market, while they unload to the all the FOMO's (those with the "Fear Of Missing Out"). 

In technical terminology, this is the "right shoulder" of the "head and shoulder formation". The head being last summers all-time highs (S&P 500) and the left shoulder last January's highs:

And that is what we see happening as the late stage of the economic cycle draws to its finale: the global economy slows, central banks wake up to the fact that, once again they overdid it on the tightening side (especially with the very highly leveraged / record amounts of debt reality). Recessions are not good for future earnings and as a result, last years earnings (hindsight) matter very little in the grander scheme of things. Stock markets do not like recessions (or even slower economic growth). 

Capital preservation is important to carry us to the other side, where the new cycle will offer fresh opportunity, which is what we will be waiting for at High Rock. Jumping in now is fraught with peril (like driving in a whiteout). Best to be patient, wait for things to start to clear.