Don't Fight The Fed, The Tape, Or The Purse: Today's Bull Market

Forbes

6 days ago

WASHINGTON, DC - JULY 18: Early morning light is seen on the White House on July 18, 2024 in ... More Washington, DC. President Joe Biden tested positive for Covid-19 while traveling in Las Vegas for a series of events. He is quarantining in Delaware, according to the White House. (Photo by)
Legendary investor Marty Zweig had two rules that every serious market participant wrote down and never forgot, 'Don't fight the Fed' and 'Don't fight the tape.' Decades later, those twin maxims remain as timeless as ever, essential navigational beacons during every cycle. But in today's uniquely charged environment, it's time to add a new maxim to this venerable list, 'Don't fight the purse.'
This is more than just a rhetorical flourish. For the first time in postwar history, the United States is running peacetime fiscal deficits of remarkable size, injecting unprecedented amounts of government spending into the economy with no wartime urgency behind it. The federal 'purse' is now a market force in its own right, amplifying both economic activity and investor sentiment. In 2025, disregarding this powerful dynamic simply isn't an option.
In my previous article, I set out to answer the burning question, 'What Could Derail The Bull Market Rally?' The core thesis, then and now, is that the greatest risk comes from a pronounced rise in long-term government bond yields, which are less subject to direct control of the Federal Reserve. As long as those yields remain contained, the combined force of monetary accommodation, a resilient market tape, and historic fiscal largesse leaves little fundamental risk for a bear market.
Unless or until long-term government bond yields break meaningfully higher, corrections triggered by excessive optimism should be treated as buying opportunities, not harbingers of a major bear market. Let's break down why, in this era of fiscal and monetary abundance, the path of least resistance remains upward.
The market's resilience today comes down to robust government policy, positive sentiment, and growth expectations. Wall Street is pricing in stronger economic expansion, exemplified by an 8.5% next-twelve-months S&P 500 earnings growth estimate, according to the Street consensus. Behind this optimism lies the OBBBA's deeper deficit spending and an assertive deregulatory push. History shows that government money finds its way into growth, stimulating spending, supporting revenue, and feeding the bull.
A crucial tailwind is the widespread conviction that the Federal Reserve will soon cut rates. With Jerome Powell politically sidelined and new leadership anticipated, markets expect future Fed policy to align closely with the administration's wishes. In effect, if the White House signals a desire for lower rates over the coming months, the market sees little reason to doubt it will get them.
This belief supports risk assets by lowering expected borrowing costs and boosting valuations. Only a meaningful, lasting inflation shock stands to upset this consensus, and as things stand, markets do not foresee such an outcome soon.
This current environment is unconventional, a wide-open government 'purse' in peacetime and persistent monetary support from the Fed. As long as these current conditions persist, investors will have fundamental reasons to stay invested.
Under the surface, the technical health of the market offers further reassurance. A high percentage of stocks are trading above their 50-day moving averages, a classic sign of robust participation across the board. The advance-decline line, a time-tested indicator of market breadth, continues to make new highs, confirming the current rally is broadly shared.
There are some early signs of risk, like perhaps rising prices from tariffs. But investors appear unconcerned, regarding tariff-induced inflation as transitory. One-year inflation swap rates one year from now (July 2026 to July 2027 inflation expectations) remain well below the contemporaneous headline numbers, a sign that, for now, longer-term inflation expectations by investors are well contained.
Take these themes together, and the outlook is clear. The market's core risk is not abrupt Fed tightening or sudden growth shocks, it's the possibility that long-term government bond yields, determined by investor confidence and supply/demand, could move sharply higher, undercutting valuations and financial conditions in ways outside the Fed's immediate control.
Major bear phases stem from persistently tighter financial conditions than we have today, not from an overabundance of liquidity and government support. As long as the purse stays open, the Fed remains accommodative, and the tape is strong, there's no durable fundamental case for a sustained downturn.
By all means, monitor sentiment, keep an eye on internals, and watch for any durable shifts in inflation expectations. But until the bond market issues a decisive warning, the balance of risks, and the trend, both remain pointed in the bulls' favor.
This article builds on themes explored in my prior piece, specifically, the critical role of long-term bond yields as the most likely market disruptor. For a detailed look at those risks, I suggest reviewing that installment as well.