When The Drugs Stop, The Markets Will Drop, S&P 500 INDEX (INDEXCBOE:SPX)
The Federal Reserve has been in the money printing game in one form or another since November of 2008, when its first asset purchase program began. We are six years into this experiment and it is still a highly debated topic among the so called "financial experts" of the world. Whether they are economists or market commentators on financial networks such as CNBC or Bloomberg, everyone has an opinion on this program. So I will chime in as well, as the fed is slowly winding down QE3 (quantitative easing).
As stated above the initial QE program began in late 2008 after the equity markets were sent reeling from the Lehman Brothers epic collapse. Back then the S&P 500 INDEX (INDEXCBOE:SPX) hit a multi-year low of 741.02 and eventually bottomed out in early March 2009 at 666.79. The first QE lasted until June of 2010 and clearly had an affect on the markets, as they had an amazing assent of 83% during its duration. The markets peaked in April of 2010 as investors geared up for the end of cheap money and they subsequently declined by 17%. Nearly heading back into bear market territory. There was definitely some sort of connection between the money printing and rising equity prices.
Then came along the implementation of QE2. While it did not officially begin until November 2010, it was all but announced by then Fed Chairman Ben Bernanke at the Jackson Hole symposium in August. This second round of money printing again gave the markets the drug they wanted, as it rallied higher but not as much as its first round of cheap money. As QE2 was coming to an end the S&P 500 INDEX (INDEXCBOE:SPX) had another case of withdrawal as it declined 21% from its peak in May 2011 to a low in October 2011. Now some were definitely seeing the link between cheap money and rising markets.
You might be wondering what halted the decline in 2011? It was the announcement of Operation Twist, another form of money printing by the fed. Just as you have seen the pattern of how the markets perform with money printing (drugs) and without. So too did the FOMC, as this time they fended off any market tantrums by not only extending Operation Twist, but by giving more cheap money in the form of QE3 which was announced in September of 2012. Oh and did I mention that it was open ended this time, meaning no one but the fed knew when it would end.
As Ben Bernanke's tenure as Fed Chair was winding down, he decided to give the markets a time frame for QE3 and in December 2013 it was decided that instead of going cold turkey by ending cheap money all at once, it would do it gradually with a taper of 10 Billion per month. During this run of money printing corporate America has taken full advantage, by using it to buy back shares, borrow money to issue special dividends or use it for acquisitions. Basically anything to boost their share price. This in turn has helped markets advance higher and make record all time highs. One has to wonder what will happen once the drug is finally taken away. If history is any guide then this market, which has not had any meaningful correction since 2011, could be in for a rude awakening.
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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.