It seems that constant chatter regarding the impending end of Quantitative Easing and potential hike in the Federal Funds Rate is disregarded entirely by the stock market.
The credibility of the Federal Reserve appears to be waning as the market refuses to take their threats of pulling away the liquidity punchbowl seriously. On what was, by any objective measure, a spectacularly bad non-farms payroll number on Friday, the S&P 500 futures rallied almost continuously 17 handles to make new all-time highs close to 2006.00 going into the weekend.
Some economists claimed that they did not believe this nonfarm payrolls print, insisting that it will be revised higher. However, with a size of the miss, even a 50% upward revision would not meet the consensus estimates.
Clearly the market is calling the bluff of Janet Yellen and the Federal Reserve Bank by pricing in a positive correlation between economic weakness and Yellen’s dovish policies. In an environment of ‘do as I say not as I do’ Fed guidance, the risk is not a devaluing of the average 401K but rather Fed credibility overall.
After years of open manipulation the Fed is perched precariously at the precipice of a potentially bottomless pit by encouraging all-time highs in the stock market. The issue now is whether the Fed will admit its folly at this point and exit gracefully or crash the party. The stock market will lose value either way, it’s simply a question of managing downside risk at this point and the longer the charade continues, the greater the risks become.