This brief post is a follow-up to an earlier one and begins with the following excerpt from a Reuter’s story posted on May 23:
Stocks dropped on Thursday, with the S&P 500 on pace for its first back-to-back daily drop in a month amid investor concerns the U.S. Federal Reserve’s stimulus may be scaled back sooner than hoped and after weak data in China.The S&P 500 had posted its biggest decline in three weeks on Wednesday after minutes from the latest U.S. Federal Reserve meeting showed some officials were open to tapering large-scale asset purchases as early as at the June meeting. The minutes came in the wake of comments earlier in the session by Fed Chairman Ben Bernanke, who said the Fed could scale back the pace of its bond purchases at one of the “next few meetings” if the economic recovery looked set to maintain forward momentum…In a bright spot, the number of Americans filing new claims for unemployment benefits dropped 23,000 to a seasonally adjusted 340,000, slightly better than expectations for a decline to 345,000, a report showed.
Most Americans either won’t read the Reuter’s story or will be unable to decipher it, so I’ll provide a clearer interpretation:
Even with a slight improvement in unemployment data, stocks dropped late Wednesday and early Thursday after Federal Reserve Chairman Ben Bernanke hinted that the Fed might stop printing $85 billion each month to prop up the economy.
If you think the market rally is primarily due to some sort of economic recovery, think again. Of course, stock prices are affected by a number of factors and it’s fair to say that the economy has seen some marginal improvement in the last few months. However, this market response was triggered by a mere suggestion that the Fed might cut back it’s $85 billion month bond-buying program and is evidence that the recent rally is Fed-driven. Big investors are counting on an ongoing Fed subsidy. Just imagine where stock prices would be if the Fed had stayed on the sidelines from the beginning. Imagine the economic hit the economy will take when these billions begin to circulate throughout the economy.