By Jeff Clark – the editor of the Jeff Clark Trader
The most bullish analysts on Wall Street are cheering the Fed’s latest move.
“The bull is back,” the analysts declare. “The Fed’s decision to buy distressed debt, junk bonds, and high-yield exchange-traded funds (ETFs) is a gamechanger.”
But is it though?
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Let’s set aside the fact that the Fed has no authority to make such purchases. It would be a blatant violation of its powers under the Federal Reserve Act of 1913. Then again, the Fed has been acting outside of its powers for the past 12 years. So, why stop now?
For argument’s sake, though, let’s concede that the Fed is going to do what it says. It’s going to expand its balance sheet by trillions of dollars by taking this unprecedented step.
Is it really a “game-changer”?
I don’t think so. Here’s why…
Back in 2008, the stock market was falling. The economy had dipped into a recession. The mortgage market was imploding. The nation’s banks were on the verge of collapse.
Then, on November 25, 2008, the Fed rode in to save the day with a program called Quantitative Easing (QE). The Fed announced it would do “whatever it takes” to shore up the banking system and keep the economy from collapsing. In 2008, this meant the Fed would buy longer-term government bonds, and other assets such as mortgage-backed securities on the open market.
It was an unprecedented move. Many analysts called it a “game-changer.”
Take a look at how the stock market behaved once the game was changed. Here’s a chart of the S&P 500 from 2008…
The S&P 500 rallied hard following the QE announcement. Many analysts declared “the bottom is in,” and “the bull is back.”
Most of the gains occurred in the week following the QE announcement. The stock market then chopped back and forth for about another month. Then the bear hit it with another swipe of its paw.
The S&P 500 fell more than 25% from the early days in January 2009 until it finally hit bottom in March. The index retested its November 2008 low, failed the retest, and dropped even lower.
That’s something to keep in mind as more and more financial television talking heads cheer that the Fed has saved the day… that the bear market is over… and that the Fed has indeed changed the game.
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