The collision of two powerful and opposing forces has created an uncertain outlook for equity markets that risks policy error from the Federal Reserve, according to the latest note from the team at Variant Perception. Aggressive stimulus from the Fed has seen markets rebound strongly, while leading indicators continue to collapse, showing the US economy is in a deep recession that will take time to recover from they say. However, it will be hard for the market to continue to focus on the Fed and ignore the deep recession as the pace of new Fed announcements slows, says the team. They cite the Chinese stock-market rescue in 2015 as offering lessons for how markets react to aggressive attempts by authorities to prop up prices in the face of challenging fundamentals. Initial Chinese stimulus caused a sharp equity rally, notes the team, which then attempted to consolidate at higher levels, but ultimately gave way to another sell-off as the pace of government intervention slowed. They see a similar dynamic at play today with the US market as the Fed tries to contain expectations for negative rates. As the team explains, the Fed put is powerful, but there will still be windows of market vulnerability as equity markets grind higher, such as a policy error from the Fed. VP recommends lightening up equity allocations or add short-term portfolio hedges.