More Cheap Money?
Click to Enlarge Investors only seem to care about one thing and one thing only: The ongoing flow of cheap money stimulus from the major central banks.
You can see this in the data. Since the bear market ended in early 2009 — when QE1 was launched and Ben Bernanke started subsidizing government borrowing — the relationship between the S&P 500 and the Fed’s monetary base is an incredible 87%.
That is, changes in the Fed’s money supply explain 87% of the changes in the stock market. In the four years leading up to this, the relationship was just 36%.
The trouble is, the latest Federal Reserve meeting minutes point to a tapering of the ongoing $85 billion-a-month QE3 program “in coming months,” with officials weighing tapering before the economic outlook improves.
The risk is that the Fed is losing control of the bond market as 10-year Treasury yields push back toward 3% — the level that spooked the markets in May and caused the Fed to table the taper discussion. High-yield corporate bonds also are under pressure, suggesting the credit markets are less than ebullient right now.
I continue to recommend investors view the Dow 16,000 milestone with a healthy level of skepticism. This feels a lot like the setup heading into the Dow Jones’ charge on the 15,500 level back in May.
Sure, it was a less meaningful, non-round-number threshold. But the context in terms of sentiment, breadth, and bond market conditions suggests downside risks are growing.
As of this writing, Anthony Mirhaydari did not hold a position in any of the aforementioned securities.