Who’s Buoying up the Stock Market for 2012?

Federal ReserveThe stock market wants to go higher and I’m amazed at the brazen accommodation of the U.S. Federal Reserve in terms of keeping equity investors happy. It’s almost as if Ben Bernanke is guiding monetary policy with an eye to helping the current administration politically. Regardless, the combination of good corporate earnings, reasonable valuations, interest rate certainty, and paternal assurance from the Federal Reserve almost ensures higher stock prices going forward. Recent central bank policy action is certainly ammunition for cynics.

 The S&P 500 Index is at the 1,350 level, which is where it was last spring. This, in my mind, represents an impressive recovery from the stock market correction that began last July. The S&P 500 would have to break 1,450 in order to technically attain a right shoulder formation, and it very well could achieve it this year. Pull up a long-term chart on the index and you’ll see the incredible formation. To be frank, I think it’s likely the S&P 500 Index will complete this stunning configuration.

 Spot prices for gold and silver are looking good in this market. They aren’t moving in lock step with the stock market, but the Federal Reserve is so keen on keeping interest rates and the U.S. dollar down, it’s only a matter of time before gold breaks its recent high. (See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.) It’s a great time to be in the mining business; it’s an industry that’s ripe for consolidation over the next two or three years. Lots of money is going to be made in gold stocks over the coming quarters.

 As I say, the Federal Reserve could not be any more accommodative in global capital markets; the stock market in particular. The unprecedented policy to target very low interest rates for the next 18 months or so may prove to be irresponsible, or, at the very least, not attainable. Policymakers (including the Federal Reserve) keep tweaking they way in which they report inflation numbers and this action is now underreporting the current state of prices within the economy. Just imagine what will happen to inflation when the U.S. economy returns to a normalized growth rate. With government spending, money supply and sovereign debt all at record levels, it seems probable that inflation is going to be a huge problem in the not-too-distant future.

 But none of this matters if you’re the Chairman of the Federal Reserve over the short term. The actions, it would seem, of policymakers today are to keep stock market investors happy, at least until the election is over. I have to admit; it’s tough to be a realist politician and make good long-term decisions when the system is designed to reward short-term action. In any case, the stock market looks good in the near term, mostly because of the Federal Reserve. As for the long term, all you have to do is pull up that long-term stock market chart on the S&P 500 Index and look at the stunning head-and-shoulders formation being formed. The big worry is the finish.