Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Quantitative Tightening Killing The Stock Market Is 'Fake News'

Stock-Markets / Stock Markets 2018 Oct 04, 2018 - 10:23 AM GMT

By: Avi_Gilburt

Stock-Markets

Recently, I read an article which stated that quantitative tightening is the “death knell” to the stock market. Can this be true?

So, allow me to show you why this is just another market fallacy which has been propagated by market analysts and the general media, and then regurgitated from one investor to another until it has risen to the point of “fact.” However, at the end of the day, this too is simply “fake news.”

While I am sure it would seem “logical” to most people that if the Fed takes money out of the system that the stock market would certainly drop. This premise is based upon the common belief that the cause of the market rally was the Fed’s quantitative easing process. So, if you remove the cause of the rally, then obviously the rally will reverse.


But, is that what has happened? And, if not, shouldn’t we then question whether the Fed was the true cause of the rally to begin with? Let’s look at some of the facts.

In January of 2014, the Fed began to taper is QE process. So, the common expectation was that the market would suffer. Well, the market was at 1800 when the Fed began to taper, and then rallied to a high a little over 2100 (a 17% rally). It sure does not seem as though the market suffered from tapering. So, let’s look further.

In October of 2015, the Fed fully halted QE. And, as I am sure many of you remember, everyone was expecting a market crash. Well, the market was around 1900 at the start of October and then rallied to 2100 in that same month. Yes, you heard me right. What many were certainly expecting to be a majorly negative impact upon the stock market turned into a 200 point (11% rally) in one month upon the halting of QE. It sure does not seem as though the market suffered from the cessation of QE.

Let’s now look at October 2017 when the Fed began to tighten its monetary policy. At the time, the market was at 2500. Today, we stand at 2900, which means the stock market added another 16% from the day the Fed began to tighten. It sure does not seem as though the market has suffered from quantitative tightening either.

When the Fed began to change course on its quantitative easing process, almost any market participant and analyst you spoke with expected it to have a dramatically negative impact upon the stock market. I mean, since it is “clear” to everyone that the market rallied due to the Fed, then it was equally clear that the market would now react in the opposite manner when the Fed began reversing course.

However, the fact is that the stock market has gained 1100 points, which is a 61% rally, from the point at which the Fed began to change course. Yes, you heard me right.

So, I will ask you again: Do you think everyone’s expectations about the Fed’s reversal of course causing a similar impact upon the stock market was correct? And, if not, shouldn’t we then question whether the Fed is really controlling the stock market and was the true cause of the rally to begin with?

Sometimes you have to take a step back and question the common thinking of market participants. And, when you pull back that curtain it may come as a surprise as to what you may find.

There are many fallacies floating around regarding what drives the stock market. When you are able to cut through the fallacies you can then have a better chance at successfully managing your investment portfolio and risks based upon the realities of the market rather than the fallacies.

The reason I think this to be important is that almost all market participants view the Fed as almost omnipotent when it comes to the perceived affect is has on the stock market. And, once this bull market completes in the mid-2020’s as the market approaches and potentially even exceeds the 3500SPX region, we may be entering a 10-20 year bear market as I see it right now. During that time, everyone will be quite certain that the Fed can come to the rescue. However, we seem to have forgotten our history, which will likely lead to mass disappointment and substantial losses when the Fed will be unable to stem the tide.

Oh, yes, I know. This time is different, as the Fed really does control the markets now and they know how to avoid market crashes.

But, as George Santayana wisely said, “those who do not remember the past are condemned to repeat it.”

For those that know their stock market history, you would know that those “in the know” were absolutely certain about the impossibility of a market crash right before the market crashed and lead us into the Great Depression. Let me show you a few examples:

"We will not have any more crashes in our time."

This was said John Maynard Keynes in 1927, two years before the stock market crash which lead to the Great Depression.

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."

- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"There will be no interruption of our permanent prosperity."

- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

Have any of you heard of the Pierce Arrow Motor Car Company? You have not? Well, that is because they went bankrupt during the Great Depression. But, I digress.

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months."

This was said on October 17, 1929, a few weeks before the Great Crash, by Dr. Irving Fisher, Professor of Economics at Yale University. Dr. Fisher was one of the leading US economists of his time. He, too, was certain of the Fed’s ability to engineer and manage the economy and the markets. Yet, only three years later, he would write:

“The Federal Reserve System, from February to December 1931, increased the issue of Federal Reserve notes by 80%. These issues were due to bank failures which made necessary a larger use of cash. Yet, after a wave of bank failures . . . both banks and their depositors began raiding each other in a cut-throat competition which more than defeated the new issues of Federal Reserve notes.” Irving Fisher, Booms and Depressions, 1932

But, yes, I am sure you are all right and that this time will be different. The Fed has learned so much since the Great Depression, and now really knows what to do. I mean, are they not the reason we have been rallying since 2009? Well, based upon my analysis above, maybe its time you recognize that correlation is not the same as causation.

And, if you still believe in the omnipotence of the Fed to control our markets, you may want to read an old article I wrote regarding the ability of the Fed and the Plunge Protection Team to prevent crashes based upon the realities of history:

Sentiment Speaks: Trump Announced His New Plunge Protection Team And The Market Will Never Experience A Crash Again

Sorry to burst everyone’s bubble.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

© 2018 Copyright Avi Gilburt - 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.


© 2005-2022 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