The stock market is such a selfish system, looking only to satisfy its short-term need for capital gains. The stock market’s initial reaction to better-than-expected jobless claims and further monetary stimulus from the European Central Bank, the Bank of England, and China’s central bank was met with selling. The initial sell-off was based on the stock market’s interpretation that more action from foreign central banks would make it less likely the Federal Reserve would engage in further monetary stimulus. The stock market sure is fickle and, for the most part, irrational.
Over the years, I’ve really noticed a dramatic, unofficial appeasement by the Federal Reserve of the needs of the stock market and Wall Street. Monetary stimulus and general policy action (especially in recent years due to the financial crisis) seem much more tailored to Wall Street than Main Street. It’s why there is much less affinity for the workings of the central bank.
I wrote before that it was increasingly likely that the Federal Reserve would impart some further monetary stimulus. (See “The Stock Market and Investor Sentiment Tank—QE3 Anyone?”) The central bank will have to act soon or wait until after the election so as not to seem partial. In the end, all of the monetary stimulus to date has helped only a little bit, as the overleveraging in the housing market just needs more time to work itself out. All of the problems on Main Street are because the U.S. housing market burst.
At the end of the day, monetary stimulus abroad is likely to be more helpful than further monetary stimulus by the Federal Reserve. The money supply has already been increased dramatically, and interest rates can’t really go any lower to make a difference. The stock market, of course, is naturally only looking out for its own needs, like a child in a candy store with indulgent parents. On balance, further monetary stimulus by the U.S. central bank would help the stock market on a very short-term basis, but would do more harm in the long run. Too much stimulus is exactly how the U.S. economy got overleveraged in the first place.
The stock market is currently trading at an appropriate level, given current earnings expectations and visibility. The marketplace needs corporate earnings as a new catalyst for trading action. There was a time when some argued that investors (and corporations) shouldn’t put so much emphasis on quarterly earnings results, but I disagree. The stock market needs to get the real picture on business conditions as often and as accurately as possible, and a quarterly earnings season is just about the perfect frequency of financial reporting as far as I’m concerned.
I think the stock market is poised to go higher and investor sentiment has improved significantly from the recent correction. In my view, the U.S. economy does not require further monetary stimulus; it requires more time for the housing market to balance itself out. More monetary stimulus from other central banks, however, would be best for the creation of a new upward business cycle in the U.S. economy.