Throughout 2013, quantitative easing , regardless of whether the economic data were strong or weak, was, similar to how New York Yankees ballplayer Reggie Jackson described himself -- that is, the straw that stirred the drink of equities.
QE, for the fifth consecutive year, has provided a stock market put and has also prevented the natural discovery of prices in both the stock and bond markets.On Wednesday, the message was that the U.S. stock market will be able to overcome the reduction in bond buying in 2014 and that the inevitable rise in interest rates is already discounted by market participants. The critical questions for 2014 are whether the domestic economy can handle a climb in interest rates that will be the byproduct of slowing quantitative easing and whether stocks can rally in the face of a lessened pace of bond purchases. I continue to be of the view that the addiction to low interest rates runs deep with consumers, corporations in the private sector and our government in terms of financing the U.S. deficit, and it will weigh on optimistic growth expectations and the consensus view that stocks will rise further. The domestic economy is heavily doped up by abnormally low interest rates and monetary accommodation. Because of our inept and divided leaders in Washington, D.C., the shoulders of monetary policy (the Fed) have been needed to support growth in our domestic economy. With that monetary support moderating coupled with the lack of fiscal responsibility and the inability of Democrats and Republicans to come together, more uncertainty than less certainty of policy lies ahead. This should be valuation-deflating. I strongly suspect that a withdrawal from the interest rate addiction and a seamless transition ("Goldilocks") toward more normalized long-term interest rates will result in renewed pressures on economic and corporate profit growth and lower equity prices.
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