It’s a Fed, Fed, Fed, Fed World

With apologies to the 1963 movie, “It’s a Mad Mad Mad Mad World” starring Spencer Tracy and Milton Berle, we are currently in the midst of something new: the Federal Reserve is in control of our stock markets. Their quantitative easing and low interest rates have not boosted the economy as much as intended, but they have certainly been wonderful for stocks, bonds, and real estate.

In today’s Wall Street Journal, page A-13, in the article “Trump Tees Up A Necessary Debate On The Fed”, economist Ruchir Sharma of the investment bank Morgan Stanley¬†writes:

“Since the Fed began aggressive monetary easing in 2008, my calculations show that nearly 60% of stock market gains have come on those days, once every six weeks, that the Federal Open Market Committee announces its policy decisions.Put another way, the S&P 500 index has gained 699 points since January 2008, and 422 of those points came on the 70 Fed announcement days. The average gain on announcement days was 0.49%, or roughly 50 times higher than the average gain of 0.01% on other days.

This is a sign of dysfunction. The stock market should be a barometer of the economy, but in practice it has become a barometer of Fed policy.”

Yep, you weren’t just imagining it. How this all unwinds is unknown. Meanwhile, we should be very cautious, and enjoy the gains. This will probably¬†end nicely. Perhaps not.