What’s been lifting the S&P 500 to record levels over the past eight years? According to economic analysis, the Federal Reserve was responsible for more than 93% of the stock market’s movement. On top of that, the Fed was behind 100% of the entire market’s growth in the first half of 2013.
As the Federal Reserve removes the fuel that propelled the markets higher, investors can expect to see more volatility, an end to the long-in-the-tooth bull market, and a stock market crash.
Fed Holding Off a Stock Market Crash
Virtually everyone knows the Federal Reserve has been behind the third-longest bull market in history. We’ve been telling readers at Profit Confidential that since 2008. Still, it’s nice to have others back up what we’ve been warning.
When it comes to stocks, they usually rise and fall based on earnings and projections. You reward a stock for doing well and punish it for doing poorly. It’s how the markets work—or at least how they once did as that no longer seems to be the case.
Revenue and earnings have taken a back seat to the Federal Reserve and its easy monetary policies. In fact, the Federal Reserve is behind 93% of the entire market’s movement since 2008. (Source: “The Fed caused 93% of the entire stock market’s move since 2008: Analysis,” Yahoo! Finance, March 11, 2016.)
Former Federal Reserve chairman Ben Bernanke became Wall Street’s sugar daddy when he initiated a trillion-dollar bond-buying scheme in an effort to kickstart the flagging U.S. economy. Between November 2008 and October 2014, the Federal Reserve printed off roughly $3.5 trillion and artificially lowered interest rates to zero through three rounds of quantitative easing.
Not so coincidently, over the same time period, the S&P 500 doubled in value. Quantitative easing took income out of fixed-income investments like Treasuries and bonds and forced those looking to strengthen their depleted retirement portfolio to put all of their money into the stock market.
Fed’s Cheap Monetary Policy Replaces Earnings and Revenue
Times have certainly changed.
According to the research, 90% of the stock market’s move from after WWII until the mid-1970s came from future gross domestic product (GDP) outlooks. In the 1970s, GDP growth lost its stranglehold on the markets thanks to the widespread adoption of credit cards and consumer debt. Between the mid-1970s and early 1990s, debt was responsible for 95% of the entire market’s move.
Between the mid- to late 1990s until 2000, the tech bubble and demand for money from startups to fund operations helped explain 97% of the tech bubble. During the first several years of the new millennium, mortgages and other debt drove 94% of the market.
QE Propels Terrible Stocks Significantly Higher in 2013
And in 2008, we have the start of QE, which has been responsible for more than 93% of the market’s movement. During the first six months of 2013, the Fed was responsible for 100% of the entire market’s growth.
That’s a pretty spectacular achievement. Why? Well, for starters, the S&P 500 advanced nearly 30% in 2013. No big deal. Stocks must have done well. Nope. The increase was a result of income-starved investors looking to beef up their portfolios. In essence, they rewarded stocks for performing poorly.
In each successive quarter of 2013, a larger percentage of companies revised their earnings guidance lower. During the first quarter of 2013, 78% of S&P 500 companies that provided preannouncements issued negative earnings guidance, 81% did in the second quarter, and a record 83% did in the third quarter. A new record was set in the fourth quarter when 88% of S&P 500 companies revised their earnings lower.
Fed’s Still Propping Up a Weak Market…for Now
After halting its (maybe) final round of QE in late 2014, the Fed gave Wall Street an early Christmas present that just keeps on giving—artificially low interest rates. In spite of weak economic news coming out of virtually everywhere, stocks, while volatile, still remain near record-highs.
The fact is that the markets remain overvalued. And while the fuel (cheap money) that propelled the stock market higher and higher has been removed, artificially low interest rates have remained in place.
This has helped markets remain near their record-highs despite a weak global economy and a weak economic outlook—and despite poor fourth-quarter and year-end results and an even weaker outlook for the first quarter of 2016.
Eventually, the Fed will have to acquiesce and start raising interest rates again. After all, the unemployment rate is below five percent. What more does the Fed need as proof that the U.S. economy has rebounded?
Well, aside from stagnant wages, the astounding rise in low-paying part-time jobs, and increasing personal debt loads? Or maybe it’s the fact that the number of Americans receiving food stamps is still almost double what it was before the financial crisis in 2007? (Source: “Supplemental Nutrition Assistance Program Participation and Costs,” United States Department of Agriculture, last accessed March 15, 2016.)
Rising interest rates in the midst of weak U.S. and global economies will put additional pressure on the average American. Rising interest rates will also make it more costly for companies to borrow money and prop up their stock prices through share buybacks. Eventually, investors will have to pay attention to earnings and projections. And when they do, the seven-year-old bull market will come to a crashing halt.
Brace yourself for a stock market crash.