A colleague of mine recently made the case for why the bull market in stocks isn’t over.
His No. 1 reason is the lack of irrational exuberance, a term coined by former Federal Reserve Chairman Alan Greenspan to describe the dot-com bubble 17 years ago.
I can’t argue with that. Sentiment is paramount. And despite the S&P 500 Index jumping 22 percent this year, there is plenty of caution coming from investors’ mouths to temper the enthusiasm. We have not yet reached fever pitch.
But trading, as we know, is all about time frames. In a shorter time frame, I’m seeing exuberance that might short-circuit the rally.
And it’s all based on the Fed.
Here is today’s lead story on Bloomberg: Central Banks Drop Tightening Talk as Easy Money Goes On.
In the span of a week — from last Tuesday to this Tuesday — the S&P 500 futures rose 3.5 percent. (Going back one more week, S&P 500 futures topped 6 percent.) I’d argue those gains are almost entirely based on the same old idea: The Fed’s tapering will be pushed out, and rising interest rate pressures will be resisted.
Of course, if you stop and think about this for a second, it suggests two things:
- The Fed is still in play and its liquidity provisions will remain a driver of risk-taking sentiment.
- The Fed is still in play because there remains a substantial risk that ending quantitative easing would generate trouble for the U.S. and international economies. More than likely, the global financial system would become vulnerable to a seizure.
So here we sit. The Federal Reserve’s policy has bred exuberance, while there are questions as to why it’s being delayed yet again.
I could address the latter point but, frankly, I’m sick of discussing it. It doesn’t matter till it matters. For now, I’m expecting that Fed-led exuberance will result in a stock-market correction that could last a few weeks. But, just as my colleague said, this bull market ultimately will go higher before everything is said and done.