One topic that keeps coming up in my conversations with investors is the “Fed Put.” Questions about it often come from a place of 1) believing the US stock market looks frothy 2) being wildly overweight US stocks 3) wondering how bad it could get before the Fed steps in and saves their bacon. As a firm that runs a systematic equity strategy, it is a topic we have studied deeply. The nightmare scenario you want to avoid is whipsaw - the stock market falls, then you sell, then the Fed steps in and triggers a big rally that you miss. You get the worst of both worlds. From our stress-testing we believe we would avoid that fate, but our guard is up.

Bigger picture, we strongly believe that the Fed Put exists, and also that it is likely struck closer than most investors think. We don’t know precisely where - and neither does the Fed - but I would bet on it being less than 20% and maybe closer to 10%.

Why do I believe that? Because it flows logically from the “K-shaped” dynamic in the US economy. There are two very different US economies right now. If you are wealthy enough to own financial assets, you’re doing great. Those financial assets have appreciated and inspired confidence and fueled strong spending. If you don’t have financial assets, you instead are trying to keep your head above water while prices of the necessities of life are rising faster than your wages.

So what happens if the stock market wobbles? It risks taking the top branch of the “K” with it. Which, in turn, risks removing your pillar of strength and causing the economy to weaken quickly. The Fed can either accept this risk (lol) or they can do their favorite thing in the whole wide world…aggressively print money.

Put simply - for most of history, the performance of the stock market reflected the performance of the economy. But now, the performance of the economy reflects the performance of the stock market. And we believe the Fed knows this and will act accordingly.

This isn’t the only “Fed Put” lurking in markets - I’ll write about the one in the bond market in a future letter. But it all comes back to the same conclusion - expect a hair-trigger on the printing presses.