Tuesday, May 28, 2013

Should Investors Chase the Current Stock Market Rally?

There is an on-going debate about just how much the Federal Reserve quantitative easing (QE) policy has influenced the rise in stock market prices.  From January 2009 until April 2013, I estimate it is almost 100%.

In the example above, the stock market return over the time period is compared to a hypothetical 4.52% perpetual bond which has an investment grade of BAA1. The BAA1 interest rate was chosen as a proxy for the relative risk of the highly liquid U.S. stock market.   In January of 2009, the bond would have been priced at an interest rate of approximately 8.14%, giving it a market traded price of $55.53.  At the end of April 2013, with BAA1 rates at 4.52%, the bond would be trading at par value.

Sunday, May 26, 2013

Fed Tapering Comment in Bernanke Testimony on May 22nd Exposes Stock Rally Weakness

Nothing surprises me in the stock market (SPY) (DIA) these days. Another week and stocks are up another 1%-17% so far this year. But there must be something surprising in the data that investors need to know. Some intriguing nugget of information that will satisfy the thirst for understanding just why the stock market is levitating like a Maglev train that can reach speeds of up to 300 mph while bog standard technology has passengers cruising from D.C. to New York at a snail's pace. Maybe the financial markets have just entered a gravitational weightlessness zone where the laws of financial physics no longer apply. Warren Buffet often comments that the Fed supplies the gravity. Lately I think he must mean anti-gravity.

What is driving the U.S. equities so much higher at this time in the face of slow growth prospects? And, why has the market churned higher over the past month even as the interest rates moved higher? This would be a great sign for the economy if it could be sustained. It might actually mean that the Fed can exit its stimulus program without the stock market imploding.

These are questions that in light of the change in direction of market interest rates are worth analyzing further.

For full article:  Fed Tapering Comments Expose Stock Market Rally Weakness