After selling off an astounding 56% between October of 2007 and March 2009, the S&P 500 has staged a rally for the ages, surging 120% and recovering all of its lost ground too. This stunning turnaround certainly qualifies as one of the more memorable, and unusual, stock market rallies in history. The problem is that the rally has been underwritten by the Federal Reserve’s unconventional monetary policies But for some reason, this belief has not weakened the celebration.
Although the Fed has been tinkering with interest rates and liquidity for a century, nothing in its history could prepare the markets for its activities over the last four years. (See ‘The Stimulus Trap’ article in my latest newsletter). And while most market analysts give credit to Ben Bernanke for saving the economy and sparking the rally, they have not fully grasped that market performance is now almost completely correlated to Fed activism. A detailed look at stock market movements over the past four years reveals a clear pattern: upward movements are directly tied to the delivery of fresh stimulants from the Fed. Downward movements occur when markets perceive that the deliveries will stop. In other words, the rally is really just a bender. The rest is commentary.