I also think a second quarter of declining GDP will trigger alarm at the Fed. Two consecutive quarters of declining GDP are the textbook definition of a recession. The Fed will have to revisit its rationale for tapering its purchases of US Treasuries and agency paper. This won't happen right away, but we also won't have to wait until August to see whether the Fed is anticipating a second quarter GDP decline. Chair Yellen and her allies in the FOMC have shown the intellectual flexibility to turn on a dime. Stanley Fischer's swearing-in as the Fed's newest governor comes just in time. I expect him to do exactly what he did at the Bank of Israel when the next US crisis hits, until the crisis overwhelms the Fed's management tools and the US is forced to devalue its currency.
Meanwhile, the DJIA and S&P 500 are hitting record highs. The rah-rah crowd ignores mean reversion, but it's going to hurt when stocks return to their historical long term average of a P/E ratio at 14. Don't count on earnings climbing to make these elevated equity valuations look like a new normal. Incomes are stagnant and young people can't spend on household formation when they carry enormous college loan debts. Consumers simply will not be able to spend at levels that keep corporate earnings elevated.
I expect more bad GDP news, more Fed overreaction with stimulus, and more financial problems for Americans regardless of whether they own stocks. Nothing has changed the Alfidi Capital basic investment thesis.