Nice mention in Alan Abelson’s Barron’s column this week:
“OUR UNEASE ABOUT THE STOCK MARKET and, to a lesser extent, the economy, also springs from the fact that the Fed has been the prime agent of stimulus for both. Our misgivings, let us make clear, do not imply that Bernanke & Co. should have stood mutely by when the financial system and the economy seemed headed for perdition. In our view, they unarguably did the right thing in shelling out hundreds of billions to keep both from going under.
But we also believe they were excessively eager when the crisis ebbed to keep share prices rising via QE2, if only to buoy consumer sentiment (which strikes us as akin to buying approval). In any case, it’s difficult to underestimate the impact of such stimulus or accurately gauge what might happen when it vaporizes, as it likely will as early as this year.
Which leads us to an interesting riff by Barry Ritholtz, chief cook and bottle washer at Fusion IQ, entitled, “How Much Has the Fed Distorted the Stock Market?” In search of the answer, Barry sizes up the averages of the rallies for one and two years going back to the 1930s. He found the most intense of the postwar moves came in 1982, when stocks shot up 58.3% in the first year — until, that is, the scorching bull run of 2009, which posted a rousing 68.6% gain.
Over two years, the winner had been the bull market that started in late 1974, following the end of a devastating bear market, and climbed 65.7%, only to be left in the dust by the current astonishing advance that racked up a 90.1% gain in just 22 months.
The critical question is how much of this fabulous performance is attributable to the Fed? While it obviously can’t be determined to the penny, Barry reckons that even if only half the market’s superior showing compared with the best of previous postwar rallies can be credited to the Fed, it means that the U. S. central bank created out of thin air “several trillion dollars in market cap.”
He refuses even to guess “the end game of this or the unintended consequences.” We’re brave enough to hazard that the latter won’t be all good.
Fun stuff . . .
Up and Down Wall Street | SATURDAY
Barron’s JANUARY 22, 2011
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