Many of us have watched the climb of the stock market since March of 2009 with a general sense of of unease. We’ve watched our central bank, the Federal Reserve, do all that it could/can to move shares up. Every time the markets faltered the Fed came to the rescue and dumped piles of cash on Wall Street. Check out this chart of the correlation between the Fed’s printing efforts of the past few years and performance of the S&P.
The Fed wasn’t supposed to do this. When I started trading the idea that there was a Fed “plunge protection team” out there was total conspiracy theory territory. But by just looking this chart it is fairly clear that if there wasn’t an effort to protect against plunges before, there certainly is an effort now. We have taken leave of the market in the market. A politburo in the form of the FOMC has taken over economy.
Earnings etc still have an important role in the stock markets, but far more important on an aggregate level is whether the Federal Reserve will continue to print money, raise interest rates, and so on.
But hey, that’s reality. Lesson 1 on the Street—”Don’t fight the Fed.”
Our stock markets are now as much political tools as anything. If stocks rise the monied classes don’t complain as much. This is a vital lesson our government has learned over the years. It’s what got Obama re-elected in my opinion. Had the Dow been kicking around 8K in November it is extremely unlikely that Mr. Obama would be president today.
So enjoy the new highs. Who knows maybe we’ll continue to move higher. But know that the honesty of the market (what was left of it) has been a casualty during this rally. That may not matter to many as they watch their 401ks plump up, and don’t get me wrong I enjoy it as much as anyone, but the death of the market driven market matters to me and it should to anyone who believes in fair play. (A quaint concept I am aware.)