Do not be a bull in the headlights as central banks stop propping up stock market
by Thomas H. Kee Jr. from Marketwatch
Central banks have been infusing capital into the global financial system since the credit crisis, and now the stimulus has officially come to an end, and a new era is upon us.
If the added liquidity served its purpose, then we must respect the risks to the stock market, given the ensuing removal of stimulus. It will be as unprecedented as stimulus was.
Over the past two days we have heard from both the U.S. Federal Open Market Committee (FOMC) and European Central Bank (ECB). Those central banks were the driving force behind the stimulus efforts that directly and indirectly bolstered the price of stocks, bonds and real estate. Stimulus began with the FOMC, whose objective in 2012 was to boost asset prices directly by buying assets in the open market. They wanted to push asset prices higher, and they were successful.
The degree of success is difficult to quantify, but in 2013 we saw direct daily correlations between the stock market and stimulus, and the FOMC considers their program a success. If you do not believe that stimulus pushed asset prices higher than they would otherwise be, you should look carefully at the objective of the FOMC stimulus program. That was the exact intention, and it worked.