Ever since it bottomed out in the 4th quarter of 2018, the equity markets have demonstrated tremendous resilience in their ability to continue powering higher despite some pretty challenging economic and political circumstances.
The U.S.-China trade war continues to raise the prices on imported goods for both businesses and consumers. It's forced many companies to update their supply chains in order to minimize the impact.
The S&P 500 has experienced virtually flat earnings growth over the past 12 months. Small-caps continue to struggle with negative growth.
The escalation of tensions with Iran has threatened to spike commodities prices and send stock prices into a sharp correction.
Yet despite all of this, the S&P 500 was up 28.9% in 2019. It's up 0.5% in the first few trading days of 2020. Considering all of these headwinds along with a global economic slowdown, U.S. stocks seem to shrug off any potential reason for concern and just keep pushing higher.
Seem unusual? It should. And we have just one entity to thank for all of this: the Federal Reserve.
The one constant in the current market rally is the Fed's willingness to lower interest rates and throw gobs of money at the economy in order to keep the wheels of the engine turning.
And so far it's worked. Mortgage and other loan rates remain low. Consumer spending is strong. With record low unemployment, workers feel comfortable enough in their jobs to continue acquiring things and racking up debt doing so.
But the markets have behaved particularly unusual over the last several days.
The futures markets have plunged overnight on multiple occasions when military actions occur with Iran only to fully recover and eventually turn positive. In fact, a notable and sometimes unexpected rise in the S&P 500 has occurred on a daily basis lately.
While some market pundits will simply watch in awe of a market that keeps going up, the explanation is simple. Because the Fed simply keeps inflating this bubble.
Here's the one simple chart that explains why the market keeps rising.
It's the daily chart of the S&P 500 with notations for how much liquidity the Fed is pumping into the economy on a daily basis. Some of these purchases are simply 1 business day transactions that roll off quickly. Some are 14 calendar day purchases that keep accumulating on the Fed's balance sheet.
It used to be that $10 to $20 billion daily purchases were the norm. Today, we can see that the Fed has stepped up the stimulus. Now, $50 billion a day is normal. Since these purchases could extend into Q1 2020 and beyond, is $100 billion on the horizon?
The Fed has already undone more than half of the quantitative tightening it did since the end of 2017. And it took just 4 months. A return to a $4.5 trillion balance seems inevitable at this point with $5 trillion a distinct possibility sometime in 2020.
But it's driving asset prices higher and that seems to be the primary focus of both the Fed and the White House.
Remember this headline from November?
I have one good guess as to what came out of this meeting.
In the end, don't wonder why the market is behaving like it is. The Fed is causing. It's blowing this bubble up as much as it needs to in order to keep pushing asset prices higher.
This strategy may work in the short-term, but eventually the chickens come home to roost.
If you liked this article, please click the LIKE button or share it on Twitter, Facebook, etc. using the buttons below.
Feel free to leave any comments, questions, or thoughts on the ideas presented here (and sign-up if you haven't already).
Follow me and receive periodic notifications when I post here by clicking the FOLLOW button at the top of the page!