last year everyone saw the fed as the market savior; injecting all kinds of stimulous and giving investors "its only a matter of time" type of hope..what does that mean? its only a matter of time before all the QE1's and QE2's start bearing fruit by way of job growth and sustained economic growth; hence the rise in the market. Now, here we are with slower growth and an unemployment rate that creeping back up. investors are now saying "damn, if all this stimulus is'nt working what will !!!! to boot, all this stimulus is causing inflation fears on top of slowing growth. i also think that initially the street blamed this on Japan but its quite obvious there is something more going on here.
One could easily argue that the withdrawal of stimulus is going to create a megaboom because: a) the stimulus has been received yet not cycled back into the economy by the recipients (I'm mainly talking about bank reserves here but I'm sure there is other stuff too) b) I would not invest either in a patient on intensive care. Not even if I was loaded with cash that I didn't know what to do with (like many large caps and probably the rest as well, except small biz) c) The patient is trying to walk again (hurray). If he doesn't collapse in the first attempt most likely he will gain (excess) confidence (and then fall later anyway). Not saying this is how it will go down (in fact this is pretty much the best case and thus not the most likely case), but the withdrawal of QE2 is not a negative per se for asset values. I doubt any of the smart (i.e. most) money coming into stocks has been buying on the notion that QE2 will create rampant inflation because we all know what happened last century with prices during rapid inflation. If one is smart and really believes this they would be shorting treasury rates, buying gold and other hard assets (art) and so forth. Anybody who sells on the news that QE is ovah is weak hands, but if the recovery is seriously jeapardized (which it is not yet at this point) then we could see some real outflows. Also note that the amount of weak hands holding stocks should still be relatively contained given the pretty mediocre amounts flowing into (but really mostly out of) equity mutual funds. On a final note, the real estate market really is the epitome of a dumb money market. There is almost only dumb money participating in the real estate market (by that I mean, nobody makes informed, sound financial decisions and treats their home as an investment. It's pure emotion). As long as the "cool/smart guys" at the party are renting, there are no uncontained financial risks (crazy derivatives, failing hedgefunds or you name it really) I don't see that much downside. That said we are in a short-term downtrend (although my instrument the cac40 has really been forming a bull flag rather than a downtrend imo if you take the total return index) so I would not be at all surprised to see somewhat lower prices still while the QE2/Q1 recovery trade unwinds.
If the market is in a bad mood it will blame falls on the end of QE, if good, rises will be attributed to some of your claims above. The reality of what QE *actually* achieves is plain for all to see: sod all. After 20 odd rounds of QE in Japan, the stock market is 75% (yes, SEVENTY-FIVE PERCENT) down from its 1989 peak. Nice going, BoJ. QE at best makes credit more available (and that's only if we don't simultaneously require banks to bolster their reserves). No matter how much credit is there, you can't force businesses to borrow. People who talk about QE 'hitting' the economy don't know what they're talking about - this is MONETARY easing, not fiscal, for Gawd's sake. The Fed is not handing out cash to people who don't have any, it's boosting the balance sheets of the banks that own it. In a desperate state of hope that this might persuade them to lend to businesses who don't want to take on another dollar of debt Remember, we are in a balance sheet recession; there's so much debt overhang from the previous crazy asset boom of 1997-2007 that anyone who normally invests to create jobs is still pissed off at all the money they borrowed to buy overpriced tripe. And with all that, look at the weird optimism in stocks. 2000, anyone?
The average proportion of assets held in cash across the mutual funds is at an all time low right now. It's the smart money that's getting out.
1) I do not necessarily believe what I wrote, but I consider it among the options of what may happen in the future (which as you know nobody can predict) 2) Mutual fund cash levels are low not in the least because they have been buying hand over fist despite lack of much inflow from their client base and in some cases even massive outflow. Mutual fund manager = smart money. Mutual fund holder = dumb money (in general, not absolutely). 3) Japan valuations were much more stretched than anything we have ever seen in Europe or the US. Japan stocks are relatively cheap now. Go buy some.. 4) Although there is not necessarily a causal relationship, it is peculiar that GDP growth (and a host of other things) started performing less well after QE2. If the inverse is also true, then the abandoning of QE should be a tailwind for the economy.
1) Yes, that wasn't lost on me! 2) The issue with mutual fund managers is that none of them dare to be in cash if their peers are in stocks - the risk of 'missing out' scares them to death, whereas if they're all wrong, there's company for their misery 3) Er, go buy Japanese stocks? I've been hearing that for the last 20 years.. 4) The two are completely unrelated. QE is just an excuse the media use to explain events that can only be explained by investor mood. Don't waste your time trying to find relationships.
3) Well their yields haven't been bad for a few years so since both the Nikkei and the S&P500 aren't total return indices I would want to look at what the total return has been since 2005 or something to say whether those Japan lovers were all that wrong. 4) Yes, of course I agree with that it´s not QE driving the markets higher but investor moods (isn´t that what always causes everything anyway, except in major fundamental shocks like a financial crisis or some kind of unanticipated sudden undeniable boom). But QE does have effects on the real economy. It's just not clear what they are exactly and it might as well be the cause of slower GDP growth since the start of it.
I guess buying the dips and hanging on for the dividends long term might have worked. I'm curious to know how many funds or individuals did this. My guess is wild swings between "Yes, it's a recovery!" and "We're shafted!" would have prevented them from executing any rational strategy. I genuinely believe that the effect of QE on either the market or the economy could well be precisely zero. Making money available when hardly anyone wants to borrow is practically the same as not making it available. Theoretically, if one big player (the Fed) could move markets we could always have healthy, non bubbly bull markets. Utopia for all. It's society's fear and greed that make the markets what we all love so much!!