Going Nowhere Fast?

The S&P 500 equal-weighted index has been going nowhere fast since the Fed cut the federal funds rate (FFR) by 50bps on September 18 (chart). The same can be said for the Russell 2000. The stock market rally has stopped broadening since the Fed's rate cut! Why is that given that the current earnings season has been mostly upbeat?

The problem is that the bond yield has been rising and tightening credit conditions ever since the Fed eased credit conditions! That's a rather unusual response to the first rate cut in a monetary easing cycle (chart). The bond market agrees with our opinion that the Fed cut the FFR too much, too soon. Indeed, the latest economic indicators have been strong, as we expected. In addition, the US Treasury Department plans to raise a whopping $1.3 trillion over the next six months.