Thursday, April 11, 2013
The only rational explanation for the market’s gravity-defying performance is the Fed. As long as investors remain convinced that the Fed has their back, they want to be in stocks even if fundamentals don’t justify the market’s recent performance. Keep in mind that it’s not just the Fed; all the central banks of the rich world are in on this ‘game’ together.
The Bank of Japan was a bit late to this party, but they have more than made up for that with the size and scope of their program. And the Japanese ‘stimulus’ is having impact far beyond that nation’s borders, including in Europe and in the U.S. As a result, yields on European government bonds, including of peripheral nations, have been coming down in recent days despite the Cyprus scare and concerns about Portugal. The same trend is playing out in the U.S. treasuries, with yields firmly back under the 2% level.
Fighting this global central bank cartel has proven to be a losing proposition for investors. The question is how long this party will last? Central banks used to be the mature adults in the room who would take away the punch bowl when the party got too noisy. They don’t seem willing to play that role at present. But it is exactly a role along those lines that will determine the future of the market rally.
Investors are saying through their trading actions that they don’t care about economic or earnings data as long as the Fed remains on their side. That’s why they shrugged last week’s weak economic data, discounted Wednesday’s hawkish-looking Fed minutes, and will likely celebrate this morning’s positive Jobless Claims numbers. This ‘heads I win, tails you lose’ will remain in place as the current Fed stance remains in place.
Director of Research