Fed Abandons Stock Markets In 2015, Watch Out

Adam Hamilton profile picture
Adam Hamilton


  • The powerful rallies of 2013 and 2014 were driven by extreme Fed money printing to buy up bonds, and the Fed's associated implied backstop for the stock markets.
  • But with QE3’s new buying terminated and any QE4 a political impossibility with the new Republican Congress, 2015 is going to look vastly different without QE.
  • With the Fed’s balance sheet and zeroed interest rates finally starting to normalize in 2015, the lofty and overvalued Fed-levitated stock markets are in for some tough sledding.

The seemingly-invincible US stock markets powered higher again last year, still directly fueled by the Fed's epic quantitative-easing money printing. But 2015 is shaping up to be radically different from the past couple years. The Fed effectively abandoned the stock markets when it terminated its bond buying late last year. So this year we will finally see if these lofty stock markets can remain afloat without the Fed.

Mainstream stock investors and speculators are certainly loving life these days. The flagship S&P 500 stock index enjoyed an excellent 2014, climbing 11.4%. And that followed 2013's massive and amazing 29.6% blast higher! The last couple years were truly extraordinary and record-breaking on many fronts, with the US stock markets essentially doing nothing but rally to an endless streak of new nominal record highs.

Such anomalously-one-sided stock markets naturally bred the extreme euphoria universally evident today. Greedy traders have totally forgotten the endlessly-cyclical nature of stock-market history, where bear markets always follow bulls. They've convinced themselves that these stock markets can keep on magically levitating indefinitely, that major selloffs of any magnitude are no longer a threat worth considering.

But extrapolating that incredible upside action of 2013 and 2014 into the future is supremely irrational, because its driver has vanished. The past couple years' mammoth stock-market rally was completely artificial, the product of central-bank market manipulation. The Federal Reserve not only created vast sums of new money out of thin air to monetize bonds, but it aggressively jawboned the stock markets higher.

Virtually every time the Fed made a decision, or its high officials opened their mouths, the implication was being made that it wouldn't tolerate any material stock-market selloff. The Fed kept saying that it was ready to ramp up quantitative easing if necessary. Stock traders understood this exactly the way the Fed intended, assuming the

This article was written by

Adam Hamilton profile picture
A lifelong student of the markets, speculator, and investor, decades of experience have forged Adam into a hardcore contrarian. He believes in buying low when others are afraid, then later selling high when others are brave. He founded the financial-market research company Zeal LLC, and continues to write acclaimed weekly and monthly subscription newsletters.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own various SPY puts positions which have been recommended to our newsletter subscribers.

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