The year-end
rally for U.S. stocks would be a lot more impressive and significant if the whole thing weren't driven by a confused, cornered Federal Reserve.
Not everyone agrees with that statement, but a growing chorus supports the idea that since the market's bottom in March 2009, the run has been fueled by aggressive monetary policy, and little else.
“What has been triggering these rallies is monetary policy, not some indication that earnings will be higher,” said Bob Rice, managing director at Tangent Capital.
“All the debt and all the monetary policy has created this artificial market, and everyone is on a hair trigger because it is artificial,” Mr. Rice said. “It's hard to overstate how artificial the markets have become, and how unhinged they have become from fundamentals.”
As Federal Reserve Chairwoman Janet Yellen
tiptoes ever closer to something that appears to be a hint about when the Fed might implement its first interest rate hike since 2006, critics of the central bank's influence on markets are virtually blowing their tops with frustration.
“The government is always there to stimulate the minute they see a recession in the short run,” said Peter Schiff, chief executive of Euro Pacific Capital.
He not only doesn't think the Fed will raise interest rates next year but believes the U.S. is on course for a fourth round of quantitative easing, because the economy has become so dependent on monetary policy for support.
“The economy is not nearly as strong as the Fed wants us to believe it is,” Mr. Schiff said. “Why is it possible the U.S. is the lone country in the world not going into a recession right now?”
One response is that the U.S. led the way into the global slowdown. then led the way out.
“We were ground zero, we caused it; we went down the hardest and recovered first,” said Paul Schatz, president of Heritage Capital.
“I think the Fed conspiracy theory is completely absurd," Mr. Schatz said. "This market is no more tied to the Fed today than it was five, 10 or 15 years ago. The Fed can create a tailwind or a headwind, but nothing else, because the Fed follows the markets, not the other way around.”
In making his argument, Mr. Schatz pointed out the short-lived impact of the 2013
taper tantrum after the Fed's announcement that it planned to start winding down its five-year QE program and when investors' knee-jerk move out of bonds caused a temporary spike in bond yields.
“If the Feds really were wizards pulling levers behind a curtain, then how do you explain the stock market's 50% decline from 2000 to 2002, or the 57% decline from 2007 to 2009?” Mr. Schatz asked.
It is a fair point, but it might not fully consider the impact of Fed policy since 2009, when its balance sheet of $800 billion was less than a quarter what it is now, at more than $4 trillion.
“March 2009 was a dark time until the market interpreted the Fed as being all in,” said Quincy Krosby, market strategist at Prudential Financial Inc.
She endorses the Fed's best intentions of getting markets and the economy rolling by injecting liquidity and essentially forcing investors into riskier assets.
“The Fed wanted monetary policy to be a jumper cable to getting the economy back to normal; however, what happened was we started to see hiring mainly only by small business, and instead of capital expenditures by corporations, they used the cheap money for share buybacks,” Ms. Krosby said. "Then what happened was the taper tantrum, and every central banker started saying they would do whatever it takes to keep rates low, and that calmed markets down.”
Even though she acknowledges its unprecedented support of the U.S. economy and financial markets, Ms. Krosby believes the Fed wants to and will wean the markets from a dependence on monetary policy.
“The Fed doesn't mind that it has helped support the markets, because they had to jump-start the economy in some way,” she said. “If you notice and read what [Ms. Yellen] says, she talks about Fed policy being more data dependent, because she wants to wean the markets off quantitative easing.”
