The Fed Has a Few Problems…

First, it’s a victim of its own success. Until around 2008, no one cared about the Fed. It was the nerdy kid that never got invited to the party… The market snoozed through its policy briefs.

But since the global financial crisis began, you could say the Fed’s “stock” has been on the rise. That’s because it boldly claimed it could “fix” the problems. If you ignore the economy, and only look at the equities markets, it seems the Fed has done just that.

Just look at the lift quantitative easing has given to the S&P500 since 2009:


QE1 pushed the S&P500 up 26% between January 2009 and April 2010.

QE2 pushed the S&P500 up 24% between September 2010 and July 2011.

Operation Twist and LTRO have pushed the S&P500 up 42% since October 2011.

So, now the market believes the Fed has magic bullets that can fix anything. What’s more, equity investors are now addicted to the stimulus… speculating when the next booster shot will come and clamoring for more market-moving rocket fuel.

The market’s expectation for continued stimulus is pressuring the Fed to keep up the act. And they’re not disappointing with the promise of $85 million a month until, well, whenever they feel like stopping. 

But now they have another problem…

The S&P500 is on the verge of making a five and a half year high! The Fed can’t claim the equity markets need saving or fixing. Ok… they’ve never outright framed their justification for easing this way, but it’s been the unspoken understanding of equity investors.

It was easy to “sell” QE1 after the S&P500 dropped 41% between October 2007 and January 2009.

It was easy to “sell” QE2 after the S&P500 dropped 12% in a five-month period.

It was easy to “sell” Operation Twist / LTRO after the S&P500 dropped 16% in two months.

But now, with the market addicted to the Fed’s constant drip of happy juice, it’s troubling to think about how painful a cold-turkey withdrawal would be.

While it’s hard to say exactly what the Fed’s exit strategy may be, one thing is clear: it’s now THE guest of honor at the (stock market) party… and everyone’s hoping it shows up with a boat-load of booze.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.