Another week, another parade of new highs for the major stock market averages. I don’t know when this rally will end, but I know it will end badly when it does. The economy may be improving—and I believe it is—and stock valuations may not be nearly as stretched as they were at previous market tops, but it won’t matter. The Federal Reserve is driving this equity bull market, period. The Fed is spending $85 billion a month buying bonds; thus there is always a bid in the bond market regardless of the piddling rates bonds now pay; thus the Fed is crowding out any and all investors who want to buy bonds for the interest income; thus investors looking for returns (i.e., everyone) have no place to go but equities. What else can you do? You have to have large amounts of excess capital to buy real estate, so that’s off the table for most folks. Commodities—another option—are in a grinding bear market and don’t provide interest or dividend income to cushion the price declines. It’s stocks or nothing, so as long as the Fed is distorting the bond market, stocks will rally. This is the reason stocks are rallying, and once the Fed slows the rate of bond-buying, the S&P 500 will drop ten to twenty percent, no matter what the economy is doing. If the Fed shuts down quantitative easing altogether, it’ll be more like 30 percent. If the Fed actually gets worried about inflation and raises short-term rates, we’re looking at a 50% drop. I’m not saying that investors won’t rediscover fundamentals after the rout is over, or that stocks won’t subsequently regain much of the ground they lose—that will depend on the state of the economy and the effect the rout has on investor psychology. But make no mistake: there will be a rout. Bernanke’s grand plan to stimulate the economy may work, and it may not; if it works, the labor market will improve and GDP will rise—and the market will crash anyway. Maybe Bernanke accepts a crash in financial asset prices as the cost of reviving the real economy—that seems possible. If that’s his thinking, he certainly can’t say so. It would be nice if he could get some help from our elected officials, but I doubt he’s holding his breath. In fact, if the Republicans make gains in next year’s midterms, that $85 billion a month is more likely to go to $185 billion than to $0.
Wait…isn’t that exactly what I wrote last week? Why, yes, it is. Stocks turned in yet another week of steady gains (S&P +2%) for no real reason other than why not? When the market gives me something—anything—new to write about, I’ll be happy to write about it. Every single word I wrote last week about stocks, bonds, fiscal policy and monetary policy is true to the exact same extent that it was (meaning if you thought that analysis was crap, this is crap to the exact same extent).
Does Europe even still exist? Someone should check.
The Family Stock Index broke through 16,000 for the first time on Thursday, with this latest milestone coming just two months after our first close above 15,000. Internals were favorable (19 advancers to 6 decliners) and the number of new 52-week highs within the index—a whopping ten—is the largest I remember seeing in a single week. How far have we run? Consider this: the FSX could suffer a greater than six percent correction right now and still hold above the 15,000 level—a level we only reached for the first time two months ago. Is there any reason to be concerned we’re nearing a top? Reagan did hit a new all-time high on Tuesday before rolling over and closing down on the week, but that’s it, and that’s not much. True, we need a boatload of awesomeness to come through for us in the back half of the year to justify this six-month rally, but with this kind of momentum, you’d be crazy to short the FSX here.
Katie’s handling the advancers & decliners this week (with my comments in parentheses) because I’m very busy listening to ‘Heart Attack’ on repeat.
- Jenny (JNY) +5.4%. – Because, you know, unexpected Great Wolf Lodge trip? What more could a Jenny want? Not much. Except for some music.
- Zondro (ZQK) +4.3%. – Maybe he’s planning to go hang out with the Fig dogs while they’re gone. I think he’d like some new friends. Wilson isn’t exactly the most playful friend a dog could have.
- Marcus (MCS) +3.8%. – Generation X is the best. (Mr. Sensitive: Because of the chromium cover?)
- Charlotte (ICE) +3.1%. – Only about three more weeks of school, and then the girls will be ready for summer visits at Aunt Charlotte’s. Hopefully Charlotte’s ready too. Really she’s up because she knows how good Grey’s Anatomy and Nashville were this week.
- Mario the Elder (MGEE) +3.1%. – Because we’re finally into summer weather. Dad likes it, and Mom apparently only really likes it when it’s hot. And if mom’s happier, dad’s happier.
- Katie (CATY) +3.0%. – I’m taking a day of vacation on Monday to hang out with my family and that seems like (Mr. S: seems like?) cause for celebration. (Mr. S: And she’s going to a blogging conference on Saturday—I kid you not.)
- Justin (SCI) +1.9%. – He’s hoping he can get back to this look: http://www.flickr.com/photos/catori_inteus/8731314699/in/photostream If he can, he’s definitely a winner. It would require a little more chub than he has these days though. (Mr. S: Did you not see how fat Justin’s gotten when he was here two weeks ago? He left dents in the kitchen floor when he was walking through. Unless that was Brinky.)
- Ed Winston (ED) -1.3%. – Mario and Nicole are entering a phase of being perhaps a little distracted and less into the life of Ed Winston than they have been up until now.
- Reagan (REGN) -2.4%. – No Great Wolf Lodge. And if we didn’t remind her, no good grades because she can’t remember to walk out the door with things like major projects she just set down on the table five minutes ago in order to pick up her backpack and then completely forgot.
- Zero (ZAGG) -4.0%. – Life as a blonde isn’t as great as expected, I guess. I think it looks good though. (Mr. S: What?)
- Jodi Ann (JOY) -5.0%. – You know what the heat of summer means in Jodi Ann’s condition? Swelling. More swelling than you can ever imagine. I hope you remember to take off your wedding ring before it’s stuck forever. (Mr. S: You can always get another wedding ring; I think I’m on my fourth.)