Your editor likes a rising stock market as much as the next man.
But we won’t be suckered into believing bogus reasons for a stock rally.
That’s especially so when the reasons don’t pass the smell test.
You’ll have read the news that the supposed front-runner for the job of US Federal Reserve chairman, Larry Summers, pulled out of the race at the weekend.
The stock market met this news with delight. Apparently – we’re told – Mr Summers would have put an end to the whole money-printing thing and set the US Federal Reserve on an entirely new course. But now, with Summers out of the way, the path is clear for the current deputy chairman, Janet Yellen.
She loves money printing, hence the market’s overjoyed response to her assuming the lead in the race to win the Federal Reserve chair.
It all sounds very believable. But if you do believe it, we’re afraid you need your head examined, because it’s 100% hogwash…
An important thing to remember about markets is that they’re always looking for reasons and excuses to move in one direction or the other.
Sometimes it’s a verifiable and justifiable reason. Other times it’s just the best excuse for the stock market going up that anyone can think of.
It’s why one day you may see the market rise because ‘lower oil prices will help cut the cost of doing business.’
And the next day you may also see the market rise because ‘higher oil prices show a pick up in demand from a recovering economy.’
To some degree it’s a glass half full or half empty moment. The same goes with the Summers withdraw.
Let’s look at two key pieces of evidence to prove why the story is junk, and also to prove that whoever takes over the top job, the result will be the same…that is, more of the same…more money printing and a maintenance of low interest rates.
Below is a one-month chart of the US S&P 500:
For that period, including the period from the end of August through to last Friday, the market assumed Larry Summers was the front-runner to lead the Federal Reserve.
So disturbed was the market by this prospect that stocks climbed 3.5% in just two weeks. Do you really believe stocks would have behaved this way if big investors thought the assumptive Fed chairman would pull the monetary rug from under the market?
No, of course not.
But what of the price spike on Monday with the news of Summers’ withdrawal? Well, it was a 0.57% gain…let’s not get too over-excited. As we often say, the market is always looking for an excuse to do something; this is one such example.
But it’s not the only proof that Summers would have happily put his finger down hard on the print button. Perhaps you remember this relatively famous TIME magazine cover from 1998:
That’s Larry on the right, at the time he was Deputy Secretary of the Treasury. The US Federal Reserve chairman of the time, Alan Greenspan, is in the middle, and then US Treasury Secretary Robert Rubin is on the left.
You can see from the headline they were dubbed the ‘Committee to Save the World’. There were responsible for saving the world from the 1998 Asian Financial Crisis.
Battle: Grey Hair
What point are we trying to make?
The point is you shouldn’t be fooled by the idea that out there somewhere there is some rational policymaker or bureaucrat who is determined to stop the madness of money printing and low interest rates.
That just won’t happen. How many more times can we say this? Interest rates are going nowhere.
You’re not dubbed part of the ‘Committee to Save the World’ if you turn up, say the party’s over and then proceed to pull the plug, causing the whole thing to collapse.
So no, don’t fall for the spin. Don’t for a moment think the US Fed was within a sniff of getting a chairman with a plan to stop printing money. That’s not how things work.
The market was just looking for an excuse to go up. It got one…and so it went up. Financial markets can be incredibly hard to interpret sometimes. Other times they can be incredibly easy.
Stock prices are rising and falling for some very dubious reasons at the moment. We like to see prices rise or fall based on company earnings and technological breakthroughs.
We’re not so excited when the reason for rising stocks is whether the market prefers a grey-haired lady to a grey-haired man.
So just be aware that when the market is this fickle, rising on little more than hot air, it won’t take much more than a cold draught to knock it back down again.
This is why, despite our belief that stock prices are heading higher, we want you to be careful. This is why we don’t recommend a big exposure to stocks. Keep adding to your portfolio gradually but with stocks this high, do be prepared for a possible short-term dip.
Cheers,
Kris+
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