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Affluent Investor | April 29, 2017

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Once Again, the Fed Drives Stocks Higher

Janet Yellen (Photo by Bill Clark / Getty Images)

Janet Yellen
(Photo by Bill Clark / Getty Images)

What a difference a week makes. Friday before last, gloom and doom ruled the markets. The S&P 500 had plunged 3.5% in just one week. Investors were dumping stocks apparently because they had somehow become convinced that low oil prices were a bad thing. Last week, it was an entirely different story. Last week the S&P 500 surged 3.4%, coming very close to its all-time high. And it wasn’t because oil prices went back up. So what explains the sudden change in mood? Well, the only material difference between last week and the week before it is the FOMC statement.

That’s right folks, we’ve just witnessed yet another Fed-induced rally. As Gomer Pyle used to say, “Surprise. Surprise. Surprise!” Once again, the Fed assured investors that it was in no hurry to raise interest rates. However, this time it played a little linguistic gymnastics. In previous statements the Fed had said that it would maintain its policy of targeting zero percent to 0.25 percent for the fed funds rate for a “considerable time.” This time the Fed said that it can be “patient.” Then it proceeded to explain that “patient” and “considerable time” basically meant the same thing. In other words, the Fed changed the wording, then it made sure that everyone understood that nothing really changed. The Fed was saying that investors don’t need to fear an increase in interest rates any time soon.

Stocks, which were already up quite a bit before the statement came out, surged even higher after the statement was released. Interestingly, the Fed also said that economic activity, labor market conditions, household spending, and business fixed investment are all improving. These are valid reasons to end the Fed’s emergency policy and move rates a little higher. But then the Fed expressed concern once again about the lack of inflation. Quite amazingly, the Fed actually blamed low inflation on falling energy prices. This is extremely odd. After all, in years past, when energy prices were rising, the Fed preferred to focus on core inflation (i.e., inflation excluding food and energy). We were told repeatedly in the past that inflation really wasn’t so high if we just ignore food and energy prices. But now that energy prices are falling, why is the Fed focusing on headline inflation? Why does the Fed ignore energy prices when they are going up, but worries about deflation when energy prices are going down? It couldn’t possibly be because the Fed’s primary objective is to prop up the stock market, now could it?

Of course, I can’t really complain that stock prices are rising. Like most investors, I am long and my portfolios are benefiting. Yet I can’t ignore the fact that Federal Reserve policy has been the biggest driver of stock prices. This has been one of my biggest worries throughout this prolonged bull market.

Read Vahan’s blog at Janjig.com.

Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.

Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.

Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).

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  • Spot on article. We really do live in massive illusions and there really is a wizard behind every curtain ! But what is so interesting is the fact that so few can perceive or actually see thru any of it? Largely because they have bought into those very same illusions which are simply control mechanisms. And all are created to control you and your tax dollars to be used against you in a myriad of ways everyday !

    The frogs are simmering just fine with only a few complaints ? And of course the illusions will continue until the day they cannot and that will be a very bad day for all including the elites who think they are exempt from any fallout ? They aren’t and we will all pay a serious price for their ego driven insanity. That day is right around the corner and crystal clear if one cares to look. Putin is about to change all the dynamics.

    This has all been known for a very long time as wiser men have pointed out .

    “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design” FA Hayek

    “The ideas of economist’s and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed the world is ruled by little else, practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist’s”
    JM Keynes

    Both knew it is all bullshit and complete manipulation by an elitist’s ruling class that are in fact simply control freaks who never pay the full price for their folly and greed. They are able to simply pass it on to the masses and create illusions to make it palatable. Steve Baze, no degree just lots of common sense still intact and intelligence @ http://www.downtoearththinking.com

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