Stocks' Stimulus Support Fades

 

Getty Images

Think back to, oh, I don’t know, let’s say last Monday. How certain were you then that the U.S. Federal Reserve was going to start reining in its vast program of post-crisis stimulus?

It’s likely you were pretty sure. The vast majority of market-watchers proclaimed themselves so in surveys before the fact, leaving Bernanke and Co.’s decision not to taper one of the biggest market surprises in post-crisis history.

But, for all its shock value, the call hardly caused stock buyers to miss a beat, certainly not in the immediate aftermath.

In the rally following No Taper it was almost as though a taper had never even been contemplated.

The Pavlovian post-crisis link between equities and stimulus seemed to hold good, and stocks powered to new highs for the year and, in the case of Frankfurt’s DAX benchmark, to a new record peak.

For a while there stimulus looked like a game stocks just couldn't lose. They rose when investors thought they were going to get some stimulus tapering. And then they rose when they didn't get any.

But now a lot of mainboards, including the Dow and the S&P 500 are either back to where they were before the Fed's last minute refusal to budge, or even slightly lower.

One explanation is that investors are now very confused.

Not only have they not got tapering, they've got very little idea over timing on when it might come.

A poll from CitiFX published Tuesday showed just over 33% of respondents gamely suggesting that, right now, no one has a clue when the Fed might rein in that $85 billion in monthly asset buying.

Logically it might yet do so in October, as St. Louis Fed chief James Bullard suggested last Friday,  or it just might not come in the working lives of market watchers now in their prime.  Remember Japan's experience. It started  QE in 2001. No end in sight yet.

The vexed question of how easy it will ever be to wean markets away from stimulus has been forced on us all again. It was back in May that Monument Securities' chief economist Stephen Lewis called stimulus a tiger from which Mr. Bernanke “dare not dismount”. Four months on we can still see the teeth and the stripes.

Of course, matters haven't been helped by the ominous approach of budget and debt ceiling battles in Washington.  When faced with this particular beast, global investors tend to hope they can ignore it, secure in the knowledge that the U.S. will find a last minute deal to slay it before the Federal government gets toasted.  And that's always what happens. But even so markets are twitchy in the run-up, and are likely to be more so now that we know even the U.S. top credit ratings aren’t immortal.

That, and the detailed parsing of Fedspeak, seems to have been enough to take the shine of equity for the moment, although, now that the European Central Bank is apparently considering another foray into the stimulus party itself , the floor under stocks looks solid enough for a while yet.