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Why the Stock Market Prefers Yellen So Much for New Fed Chief

Stock-Markets / Stock Markets 2013 Sep 18, 2013 - 09:48 AM GMT

By: InvestmentContrarian

Stock-Markets

George Leong writes: With recent news on Federal Reserve Chairman Ben Bernanke’s possible replacements, we’re seeing even more evidence that the stock market gains really are largely dependent on the Fed’s current easy money environment.


The stock market surged out of the gate Monday morning on news that Lawrence Summers, the then-leading candidate to replace Bernanke as the next leader of the central bank, decided to withdraw his name from consideration as new Fed chairman. This was major news for the stock market; Summers was not a favorite among stock market participants, because he was known to be a backer of tapering the monetary stimulus. Of course, this did not sit well with stock market participants, as it meant the easy money would end.

Stocks surged on speculation that the Fed’s Vice Chairman Janet Yellen would now become the leading candidate, since it is expected that Yellen will maintain the current Fed’s gradual approach to easing.

This surge clearly indicates how important the easy money is to the stock market.

Whether the Fed decides to begin to rein in its bond buying when its two-day meeting ends tomorrow has now become somewhat less significant compared to who’s going to take over at the helm. The fears associated with both events may be similar, but it’s the long-term implications of what a new Fed chairman could bring to the table that is now the focus among market participants.

Overall, the long-term implications if Yellen is appointed as the next Fed chairman will likely be a longer extension to the tapering timeline compared to what it might have been under Summers. For the stock market, it means the easy flow of money into the economic system will continue, helping to prop up the artificial U.S. economy and stock market over the longer term.

Yet my concern is that if this does happen under Yellen, it will cause more issues and pain down the road, as interest rates will begin to ratchet higher. Companies and consumers will continue to add to their debt loads via the easy money only to face hardship when the money is gone and the interest rates are hefty.

That’s why I feel the Fed must begin to tighten its money flow by starting tapering tomorrow. The economy is clearly much better now than when the quantitative easing began some five years ago. So with the U.S. economy improving, it’s time to slow the flow of easy money and allow the economy to recover more on its own, lessening the market’s obvious dependence on easy money. This will be critical for the country going forward.

I think even with the tapering, everything will be fine and if not, then the Fed could ease off on its future tapering and extend the timeline. For traders, it would mean you need to be more selective in buying stocks than what we have seen over the past four years.

This article Why the Stock Market Prefers Yellen So Much for New Fed Chief was originally published at Investment Contrarians

By George Leong, BA, B. Comm.
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

George Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. See George Leong Article Archives

Copyright © 2013 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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