Let’s review the basic drivers of the stock market the last two years. No it is not earnings or the economy.
Everyone likes to talk about how great the market did in 2019 not mentioning the market plunged at the end of 2018 setting up the news worthy 1-year return in 2019. But in effect the market has only traded sideways since early 2018 with a slight upward bias.
Since early 2018 the market only made a significant advance in late 2019. That breakout curiously happened at the same time the Fed dumped $500 billion into the financial markets from October to December of 2019 (plus ECB buying corporate bonds).
Why did they do this? Because they were playing Santa Claus? No, it was because they were blindsided by the repo market where banks stopped lending to each other like in 2008. Lucky they invented all these market pumping tools during the last financial crisis.
I’m sure it’s nothing. Move along. Keep buying they say. Although I wonder why JP Morgan dumped corporate loans on their balance sheets in 2018 and loaded up with safe Treasuries? Hmm. I have my ideas.
My assessment remains that we are witnessing a colossal tug-o-war between free market price discovery and central bank interventions. The central banks are winning but each round requires much greater effort – meaning purchases of financial assets with money created out of thin air.
It takes a lot to keep financial bubbles inflated when earnings are declining, the economy is weak, and some speculator somewhere is blowing up.
We don’t seem to have much time to ponder the last two years with the exciting start of the 2020s. I am sure the US markets will quickly forget about some guy in Iran getting assassinated and all – you know, what’s his name. Never mind that was so 2 days ago.
The markets will only care if the blow back hits in the US. Until then, buy-the-dip they say. But what are they doing. What are the risk-sensitive investors doing? When they start selling hand over fist, the markets will either plunge or the Fed will have to step in with their heavy hand once again.
So let’s watch them. Not the news, not the economy, not earnings reports, not the analyst predictions of where the markets will be. Watch the most risk sensitive investors in the credit markets.
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