Why The Stock Market Remains At Historically High Levels

| About: SPDR S&P (SPY)

Summary

The stock market hit new highs again last week and seem to be poised to go even higher.

The stock market seems to ride, up or down, on the "stories" that seem to dominate the minds of investors.

Right now the "story" still driving the stock market is the continued support that officials at the Federal Reserve giving for the economy and the high stock prices.

To some analysts, like the economist Robert Shiller, the performance of the stock market can depend upon the "stories" that investors dwell upon.

Stories that tend toward the negative side can lead to cumulative downside movements.

Stories that present the brighter side, like the release of the figures on jobs last Friday can spark a cumulative movement in the stock market to the up side.

This is can be the case, particularly when this story can be linked to other "good stories" of a longer-term nature that reinforce the move to higher stock prices.

The longer-term "good story" that the market has been living off of in recent years is one that argues that the stock market will continue to be strong as long as the Federal Reserve System maintains support for the stock market.

This seems to be the continuing story. This is in spite of the fact that over the past couple of years, since October 2014, when the Federal Reserve ended its third round of quantitative easing, news reports have been focused on those Fed officials wanting to raise interest rates as the US economy strengthened.

The problem has been that the US economy has not really been that strong and so these Fed officials have continually backed off from raising interest rates, with the one exception coming last December when the Fed had to raise its policy rate almost in an effort to maintain its credibility.

But, even though these Fed officials continued to talk up a rate increase during 2016, no such movement has taken place.

Now, the press are giving more attention to the Fed officials that are not generally in favor of an increase in the Fed's policy rate.

The New York Times has recently focused on Fed Governor Lael Brainard and her efforts to keep interest rates low.

Now, the Financial Times presents the results of an interview with Fed Governor Jerome Powell, who also is not in favor of raising interest rates at this time because of the weak economy.

Apparently, the press has gotten tired of covering those Fed officials that are "hawks" when it comes to talking about raising rates for almost two years and then having to continuously back off when it comes to meeting time.

Brainard and Powell, the "doves" seem to be a better story, one that gives the journalists a consistent "story," a story about continued Fed ease to sustain the stock market, keep the dollar from getting any stronger, and, hopefully, produce faster economic growth.

And, this keeps the "story" about "not fighting the Fed" alive.

Another factor entering the "story" is that Ms. Brainard takes a broader world view that just keeping a narrow focus on the United States economy.

Particularly since the British vote to leave the European Union, there has been concern about what will happen to the British economy. The recent moves by the Bank of England just underscores the concern about what is happening there.

Since the Brexit vote, the Federal Reserve System has overseen an increase in bank reserves within the US banking system.

And, with this increase in bank reserves, it is also interesting to see how US money flows off shore into international waters. This has particularly been the case during the world financial distress that accompanied the Great Recession and which only increased during the three rounds of Federal Reserve quantitative easing.

In can be noted from the Fed's H.8 statistical release that the "net (deposits) due to related foreign offices" of Foreign-Related Institutions in the United States increased in July to well above $300 billion. These balances reached significantly more than $600 billion during the Fed's period of quantitative easing, raising questions about whether or not the Federal Reserve has become the central bank of the world.

Furthermore, it is interesting that discussions about investing in emerging markets contain references to the role that the Federal Reserve System plays in what happens in these global markets.

The "story" for the stock market still seems to be "don't fight the Fed."

Even Bill Gross at Janus Global argues that the Fed will not reduce the reserve balances that it has already injected into the banking system.

So, for now, this seems to be the "story" supporting the record stock market highs of the past week.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here