Market Top 2014? – QE vs. SP500. The Fed this past week clearly indicated that QE will end in October, barring any unforeseen data points. Many have felt that the stock market rise has been primarily fueled by this QE. When QE stops so will the market rally. Is this correct?
This QE vs. SP500 correlation does seem to have some merit, after all look at the thumbnail chart. The thinking at the Fed however, is that if enough stimulus is given, the economy can reach a point and begin to run on its own. Sort of like a car engine starter. Crank the engine to the point it runs on its own. But of course this presumes that the engine is in a good state that if cranked, it can continue on its own. So will this idea work?
On the positive side, business confidence is growing. We can see this in the rising PMIs, ISMs and Capex spending – click here. Investors have long forgotten about CEOs that merely cut costs and preserve their positions in the market place, rather they want to see some real growth in new top line business. CEOs are under the gun now to produce. This view has to a degree help the economy over the past few quarters. The issue is, if you build it, will people buy it?
On the negative side one could look at falling CPIs (lack of pricing power), stagnant money supply (low credit growth), wages stagnant and meager employment. Drilling down on just one data point one could look at outstanding mortgages – click here. It is flat. So if business builds it, in fact there may not be people to buy it, though the Capex build-out can keep it going for a bit. The issue here is, if the Capex is longer over due or just a Capex bubble, that will need unwound later. This assumption of the economic motor being in a good state, that the QE starter can work on, may in fact not work due to structural issues – a point for another Blog.
So the over all market direction for the SP500 could be a bit further extension, as momentum has its power. Once the numbers (earnings, etc…) start to turn flat, the stamped to exit could be a crowed trade. But don’t worry the next major Fed announcement could be a return to QE rather than a Fed interest rate hike, extending even further the market rally, and a Dollar reversal. Longer term where this ends, is a difficult to call. What will cause this eventual crash, may have nothing to do with this policy, but for sure it will be blamed as such – similar to the 2008 crash.
Blue Point Trading, William Thompson