Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Are Stocks Going Berserk? It’s All About Expectations

Stock-Markets / Stock Markets 2015 Sep 13, 2015 - 02:28 PM GMT

By: Mike_Whitney

Stock-Markets

If you’ve been following the markets for the last three weeks, you’ve probably figured out that something is wrong. The markets are no longer behaving the way they should, and that has people worried. Very worried. In the last 15 trading days, the Dow Jones has experienced an unprecedented 13 triple-digit days, which means that stocks have been sharply rising and falling without any rhyme or reason. The financial media has tried to explain-away the extreme volatility by pointing to slower growth in China, troubles in the Emerging Markets or various dismal data-points. But none of these adequately explain what’s going on.


What’s really going on is a tug-of-war between current high stock valuations–which are the product of Fed intervention–and much lower valuations, which are based on fundamentals. Some analysts think that the volatility indicates that the Fed’s zero rates policy has damaged the market’s price-setting mechanism, that six years of overmedication has spawned an unresponsive, drug-addled system that can no longer perform its primary function. This is a persuasive argument, but it’s wrong. In fact, stock valuations are not really inflated at all given the colossal amount of support they’ve gotten from QE and zirp. (Zero interest rate policy) Since 2009, the Fed has made it clear that it is committed to asset-price inflation as a way create the “wealth effect” which is supposed to stimulate growth. Naturally, investors followed the Fed’s lead and took on more credit risk, reached for more yield, and loaded up on stocks and bonds confident that the Fed had their back. And the Fed did have their back. The “Bernanke Put” is a term that reflects investors confidence that the Fed would prevent stocks from falling too fast or too sharply. And the Fed has honored that commitment. Stocks have more than doubled in a six year, Fed-fueled “monster” rally.

The point is, the Fed’s policy is the issue not the market. The market is not a sentient being. It merely responds to input, the buying and selling of paper and the reporting of prices. But the market DOES send signals, and the signal it’s sending now is that there is a vast disparity between stock prices with Fed support and stock prices without Fed support. You see, investors are still uncertain about the way this is all going to shake out. Is the Fed going launch a cycle of rate hikes or keep rates at zero? That’s what everyone wants to know.

One group of investors think the Fed will move ahead and start to “normalize” rates while the other thinks the Fed will stand pat. The group that anticipates a rate hike, thinks stocks are overpriced and will drop precipitously. Conversely, the group that thinks the Fed will stand pat, believes stocks are fairly priced and could go higher still. It’s the competing expectations of these two main groups that’s causing the extreme volatility. Each group thinks they know what stocks are worth, but they’ve based their calculations on ‘what they think the Fed will do’.

Does the Fed understand this? Does the Fed realize that investors have already repriced stocks according to their own assumptions about rate hikes? Does the Fed see the vast disparity between stock prices “with” a rate increase and stock prices “without” a rate increase? And is the Fed prepared to initiate a cycle of rate increases (in the name of “normalization”) that could send stocks plunging by 50 or 60 percent?

I don’t think so. The Fed is so blinded by fear, it doesn’t seem to know whether its coming or going. Sure, they talk about normalization, but are they really going to end the meddling and allow the markets to function according to normal supply-demand dynamics?

Not a chance. What the Fed wants is normalization on its own terms, that is, permanent high stock valuations and a free market where prices are determined by fundamentals. Unfortunately, the two are mutually exclusive, which is why the Fed is in such a quandary. There’s simply no way to undo the extreme accommodating policies that tripled the value of stocks and created the biggest bond bubble in history without reversing their impact on the market. The Fed isn’t prepared for that. No one is. So there’s not going to be any return to normal, not in the foreseeable future at least.

Yes, the Fed can (probably) safely raise rates by a .25 basis points without too much risk. But if the Fed indicates its determination to normalize rates via a cycle of rate increases, the stock market will crash before the increases ever go into effect. That much is certain.

The Fed is probably aware that its meddling has greatly effected the credibility of US markets, but it simply doesn’t have the guts to put things back in order. The pain would just be too much to bear.

That’s why the volatility will persist while more and more investors head for the exits.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

© 2015 Copyright Mike Whitney - 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.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in