Some people have great expectations. That is the only conclusion I came to after seeing the market’s reaction to Fed Chairman Ben Bernanke yesterday. The market was flat to up before he started talking but sold off into the close after he was done. I think it was obvious that many market participants were expecting hints that QE3 was on the way. My question is why?
Different Conditions
Last August, economic conditions were anemic and inflation was running below the Fed’s internal target. Deflation was still a concern and thus QE2 was born much to the market’s delight. The S&P 500 proceeded to jump over 25% as investors swam in easy money.
However, today inflation is running a bit above the Fed’s targets and growth is still anemic. Bernanke was successful in raising the price level, but self-sustaining growth clearly did not come to pass. The Fed lowered its targets for growth and employment without giving any hints that QE3 was forthcoming.
Bad News Is Bad News
Investors were getting used to the notion that bad news was good news because it meant that more easy money was coming. In a way the flood of dollars from Bernanke was a drug, but now it’s time to go cold turkey. The economy will have to mend by itself without more artificial help, which I think is the healthiest way longer term.
Consumers cannot afford another round of QE because costs of food and energy have skyrocketed since last August, crimping economic growth. Ironically this free money was supposed to juice growth, but only juiced asset prices, while the real economy continued to struggle.
So for those expecting more QE, it’s time to move on. Frankly I was surprised the market sold off after Bernanke’s comments because that means there are still a lot of folks addicted to their free money. It’s time to go back to the days when you can’t look to the Fed to save your ailing stock portfolio. They will just have to go back to good old fashioned solid research and great stock picking.
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