If you believe that first move following the first Fed rate hike in nine years, then you believe the market was relieved exhaling.  In a perverse way, the market seemed to be applauding tightening of policy, which is counter to what we have seen for years.  Sure, the near zero interest rate policy (ZIRP) is still in effect, but the irrational behavior is quite remarkable.  While the overall monetary policy is accommodative, a removal of access via higher rates is hawkish behavior - any way you slice it. 

The market is in the process of adjusting to a new policy paradigm, and over the long term that will be good for the stock market and the economy.  The Fed controls the liquidity and the behavior/psychology of the market players.  As Marty Zweig said so many years ago:  Don't Fight the Fed.  So, does that mean we hang up our spurs and move away from markets?  That would be too neat and easy to happen, and requires timing the market.  For those trying to time exits and entries it is a difficult and nearly impossible task to nail it just right.  If we look at prior rate hike cycles they are likely to be quite different from this one.

Simply put, the Fed kept rates very low for a very long time, ZIRP was in place for nearly seven years.  Many have argued the substantive effects of such a generous policy stance and the efficacy, but we'll not take up that discussion today.  Rather, understanding why the Fed is changing policy and whether this is just a 'give back' from emergency conditions.  Let's face it - the economy is far better off today than it was when ZIRP was first announced and the follow-on Quantitative Easing policy.

But now that the first hike is out of the way, where is the policy directive?  Frankly, they left us with some holes - as is usual, for they are following the data and will adjust on the fly.  That doesn't work well for markets, who want their cake and to eat it too (transparency and certainty in that order).  The Fed may believe the economy's prospects are improving, if that was justification enough to move rates higher.  The employment outlook is better but inflation is not rising much, and in an economy floating around 2% there is just not much to be excited about.  The bond market is telling us that, too - along with the strong dollar. 

Strikingly, bonds were up following the Fed hike, telling us they are not believing the Fed's case.  The yield curve has flattened, bonds on the long end of the curve are rising and volatility is elevated.  Simply put, the bond market is not believing the story and neither is the equity market - which can get hurt if the Fed institutes more rate hikes (even gradually).  No question the Fed is in a box and is trying to get out of it, but do they have skills of a Houdini?  We'll have to see.