Two Reasons the Stock Market Is Really Different This Time
The theory of market efficiency -- that all known information is priced into a security -- still applies, but with a twist.
Certain people will find an edge to trading, but once that edge becomes mainstream, the market once again trades efficiently. Now, with the fast-track dissemination of information, the periods of market inefficiency have become shorter.
After the housing crisis in 2008, the Federal Reserve began a zero-interest rate policy. When that wasn't enough, it began an unconventional approach with quantitative easing -- the purchases of mortgage-backed securities -- and with "forward guidance," or offering clear communication about future interest rates.
In the past, the Fed had controlled only the short-term interest rate, but now by telling Wall Street firms that they can borrow at low rates for a very long period of time, presumably those firms would eagerly lend money out to the American people also at lower interest rates thereby stimulating the economy.Similar central bank policies have been taken up across Europe and are gaining momentum across the globe. The point is that the new efforts by central banks have pumped an enormous amount of money into the economy in what can be deemed an "experiment." Economists, analysts, market strategist and the Fed itself can try to surmise how this will all end, but the truth is nobody truly can or does know.
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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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