For Now, Fed QE Keeps Bubble Expanding Trumping Many Historical DJIA Patterns

July 24, 2014 3:08 PM

Yes, the market is most likely going to continue expanding its bubble, but it’s really just fueled by the Fed. The Fed’s quantitative easing (QE) programs are trumping most historical cyclical stock market patterns. Some seasonality continues to present itself, but most usual soft patches have been mitigated. Several perennial strong periods have been weak and frequently horrible. Usually strong January has been down 4 of the last 7 years. 

Election years have had a long history of solid gains, but 2 of the last 4 (2000 & 2008) got creamed and 2004 was flat. Historically weak post-election and midterm years have been a boon for stock investors and traders in recent years. Midterm years 2006 and 2010 and post-election years 2009 and 2013 were up huge, while the usual strength in pre-election and election years has been relatively non-existent.

The Fed’s zero rate policy and massive QE have trumped the historical patterns. And until monetary policy returns to normal it is likely continue. Since 2008, the Fed implemented unprecedented accommodative policies, keeping rates at zero for the past 6 years and pumping cash into the system with several creative bond purchasing (QE) programs. This arguably illustrates a failure of the U.S. and world economies to stand on their own feet.

The chart below from the Fed’s excellent website and database clearly illustrates the direct correlation between the Fed’s balance sheet with the trend and level of the S&P 500.

This phenomenon has prompted an update of our long term Super Boom Forecast. We are once again raising the floor on our 15- year projection for the DJIA since 2009. Back in 2011 when my book Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (Wiley) hit the stores I drafted a bold 15-year DJIA projection chart. This forecast does not anticipate DJIA reaching 38,820 until around the year 2025 – and for the current secular bear market that began in 2000 to drag on until 2018 or so before the next boom and secular bull commences.

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