Fundamentals Rendered Irrelevant By Fed Actions

buy-and-holdJ.W. Jones: The fundamental backdrop behind the ramp higher in equity prices in 2013 is far from inspiring. However, fundamentals do not matter when the Federal Reserve is flooding U.S. financial markets with an ocean of freshly printed fiat dollars.

As we approach the holiday season, retail stores are usually in a position of strength. However, this year holiday sales are expected to be lower than the previous year based on analysts commentary and surveys that have been completed. This holiday season analysts are not expecting strong sales growth. However, in light of all of this U.S. stocks continue to move higher.

Earnings growth, sales growth, or strong management are irrelevant in determining price action in today’s stock market. In fact, the entire business cycle has been replaced with the quantitative easing and a Federal Reserve that is inflating two massive bubbles simultaneously.

Through artificially low interest rates largely resulting from bond buying, the Federal Reserve has created a bubble in Treasury bonds. In addition to the Treasury bubble, we are seeing wild price action in equity markets as hot money flows seek a higher return. Usually fundamentals such as earnings, earnings estimates, and profitability drive stock prices. However, as can be seen below the U.S. stock market is being driven by something totally different.

Options Trader

Chart Courtesy of www.zerohedge.com

The chart above is beginning to illustrate that fundamentals are becoming irrelevant. The only thing that matters in today’s marketplace is the flow of fresh liquidity out of the Federal Reserve and into the banking system. This process helps to fuel more risk taking and pushes longer-term investors away as hot, speculative money flows into high risk assets.

The chart below, which came from Thomson I/B/E/S demonstrates that the future outlook is clearly not any better.

Chart2 (3)

As can be seen above, over 90% of the S&P 500 companies have already reported negative 4th quarter 2013 pre-announcements. Essentially, these companies are warning equity investors that earnings expectations are going to be lower than expected.

Normally this would be seen as a headwind for equity prices particularly because the ratio is the worst on record. However, equity prices have rallied straight through the dismal earnings data.

Pages: 1 2 3

Leave a Reply

Your email address will not be published. Required fields are marked *