If you had to choose a catalyst that explains the stock market rally this year, the Federal Reserve would be a solid choice.
The central bank took steps to reassure the markets that it would not increase borrowing costs as aggressively as many feared, considering evidence of softness in parts of the economy. Minutes for their January meeting released this week showed that there was even some responsibility for sales at the end of last year.
A Patient The Fed can help fill potholes in the economy and keep financial conditions loose enough to continue raising stock market gains.
However, some strategists read Fed's patience differently: as a sign that effectively marks the end of this hiking cycle. They believe that the growing evidence of a US economic downturn, combined with the risk introduced by the commercial war, is digging a hole that investors will not climb out of.
"The end of the Fed's Recognition Cycle is more often than not, a prelude to recession," said Albert Edwards, a strategist at Societe Generale who is known for his bearish view of the world economy.
Read more: 2 notorious recession signals fall into the danger zone, and they have some Wall Street strategists convinced that a breakdown is approaching
If the Fed is actually finished, the story suggests that The Next The decline can still be years away. According to data from LPL Financial, the average volume from the last hike to the recession over the past 40 years has been almost three years.
But the concern for strategists like Edwards is that the timeline will be shorter this time.
They see a familiar pattern that plays out: The Fed is speeding up, pausing when there are signs of burden, and rapidly lowering prices to contain an undoubted economic breakdown. This happened last in the years 2000 and 2008, which is why the Fed has been blamed for any crisis in the post-war period.
Edwards has long warned that the next recession may be so fierce that the Fed has to cut prices in negative territory ̵
Read more: The next recession may force the Fed to cut interest rates to negative territory. Here's what it means and how it can affect you.
He says investors should not reject the economy's warning sign and how the Fed responds.
"Where investors could easily get caught is rejecting recent weak US economic data due to one-off factors such as the very cold weather or government closure," Edwards said in a note to clients. "Investors must be twice cautious at this late stage of the cycle."
A person who is already cautious is David Rosenberg, chief economist at Gluskin Sheff. For example, after retail sales have declined most since 2009 in December, Rosenberg did not reject it as a one-time fee.
By Rosenberg, Edwards wrote: "He expects large declines in retail with this size to relate to setbacks 80% of the time. Free money may have stupid our senses, but in this very late stage of the business cycle, think very hard before you go off the pavement. "
In a note published exclusively by Business Insider, Rosenberg said further that he believed the next move in the interest rate would be down, not up.
Legendary economist Gary Shilling is also in recession and has warned that Fed tightening can trigger the next. He cites the fact that inflation has fallen below the central bank's 2% target, despite the decline in unemployment to 3.9%; Both figures have historically a negative relationship.
"The probability of a recession starting this year, which I consider with two-thirds probability, is also deflationary," Shilling told Business Insider via email. "It would end up and reverse the Fed credit enhancement campaign that started in December 2015."
If Fed tightening is over, stock market bullets can still buy time. S & P 500 increased by an average of 9% and 12% in six and 12 month periods after the increase in prices, according to LPL Financial.
But the precautionary protocol here is that investors can fight to settle with the next Fed report.