Editor’s note: Another week, another all-time high for the S&P 500.
US stocks got some help from Janet Yellen’s ultra-dovish speech on Monday. Yellen waxed lyrical – State of the Union-style – about the plight of America’s unemployed. And she promised to keep central bank policy ultra-accommodative for the long term.
Below, you’ll find Braden Copeland’s take on the Fed’s prolonged intervention in the markets… the Yellen speech… and what it means for US stocks.
Exactly What You’ll Need to Get Rich AFTER
You Survive This Game of Chicken
By Braden Copeland, Editor, Building Wealth
Bad news is good news.
It defies logic.
But for the stock market since the Great Recession of 2008-09, that’s the way it has worked – particularly in the US.
It’s bound to end badly, but it persists for now… a sinister game of Stock Market Chicken.
Whatever the employment news… whatever the debate in Congress… whatever the retail sales or manufacturing news… it just hasn’t mattered. Stocks, after a few seizures here and there, have kept moving higher.
Here’s a chart of it all. There’s little risk of spoiling the story with it. You know what’s happened so far.
I’ve got a quick recap for you here, too. Understanding how truly mechanical this process has been makes it obvious that, at some point, all of this must end… and end badly. We’re getting closer to that point.
And the fact we know there will be an end is why I recently put together a special report on what you’ll need to do when it does. I’m going to tell you how you can get your copy.
But first, the quick recap…
For How Much Longer
Can Bad News Be Good News?
When the US unemployment rate surged from 7% to near 10% between December 2008 to March 2010 the government… and the Fed… took notice.
The Fed launched its first round – worth $600 billion – of QE.
After the bad news on jobs, this first round of QE (QE1 on the chart) was great news for US stocks. The S&P 500 Index rallied 40%.
Then the Fed’s stimulus stopped… and so did the rally. The S&P 500 tumbled 13% over the next three months. Unemployment remained close to 10%. The economy was sputtering. The Fed’s plan hadn’t worked.
The situation weighed heavily on investors’ minds. Would the selloff continue? Was it time to sell and avoid another crash in this game of Chicken?
Suddenly, talk of stimulus resumed. The Fed began its second round of QE in November 2010 – another $600 billion of bond buying.
This ran through June 2011. Investors who didn’t chicken out during the previous 13% drop recovered their losses and more.
Again, bad news became good news. Between the post-QE1 low at the start of July 2010 and the end of QE2, the S&P 500 rallied 30%.
Then Congress began debating lifting the debt ceiling (how much money the country could borrow) in summer/fall of 2011. The uncertainty led to a 20% decline in the S&P 500.
Stomaching that selloff, having the discipline to follow your stops and not chickening out was difficult. If you were able to stay the course, though, you were rewarded.
More good news in the form of bad news was coming for stocks. The debt ceiling issue was resolved and more Fed stimulus was on the way.
At the end of 2011, the Fed launched “Operation Twist” (selling short-term bonds and buying long-term bonds). The financial engineering started to push US stocks higher. Investors who didn’t sell due to fear began to recover their losses.
Then the Fed brought us the biggest jolt of all: QE3. The plan called for the Fed to buy $85 billion worth of bonds per month (and continue to keep interest rates close to zero) until unemployment fell below 6.5%. As you can see from the chart above, QE3 has pushed the S&P 500 higher with the most force of all.
Looking back to the beginning, it is clear: the modus operandi for US stock market investors has been and continues to be bad news must be good news. The Fed’s actions have obviously pushed asset prices higher. The US stock market rally has continued.
If you’ve been invested in US stocks and stayed the course in this crazy game of Stock Market Chicken, you’ve almost certainly benefitted.
But if you’ve “chickened out” and sold too early, then you’ve missed some gains. If so, I’ll be the first to tell you that is completely understandable.
During all of this there were times when the situation felt untenable. And it is always better to be safe than sorry (which is why I am a strong advocate of exit rules and following trailing stops, which I write about often).
But now I believe a massive selloff is imminent. Let me explain why…
Mother Janet Yellen’s
“Mother Theresa Moment”
On Monday, we had what I call Mother Janet Yellen’s “Mother Theresa Moment.”
What made it worse, though, is what happened 12 days earlier. That was the day of Mother Yellen’s “March 19 Mistake.” That day, on the world’s stage, she gave investors the impression – apparently without giving what she was saying much thought – the Fed had a relatively firm timeline for raising short-term interest rates… and that it was not far off.
It was a grave blunder. Within seconds the S&P 500 Index sold off 1%. Investors were petrified. Without the Fed holding interest rates near zero, the US stock market would likely get clobbered. It was a very real time for investors to consider chickening out.
Then, less than two weeks later, Mother Yellen did a complete about face to “clarify” her position. This was the “Mother Theresa Moment.” She took the opportunity to tell three real stories about individuals who couldn’t find jobs.
She had talked to them personally. In relating the stories, she wanted to appear less clinical and more “in touch” as she considered the US unemployment situation.
She used the stories to prove “considerable slack” still existed in the job market, requiring stimulus to continue for “some time.”
Investors interpreted her words to mean Fed stimulus would last far longer than Mother Yellen had led them to believe on March 19. US stocks have been in rally mode since… with the S&P 500 hitting a new all-time high on Wednesday.
If you didn’t chicken out when Mother Yellen blundered on March 19, good for you.
Just put on your helmet and keep an eye on your stops…
Your Plan for Building Easy Wealth
When this Game of Chicken Ends
What is happening with stocks is insane… just like playing Chicken.
At some point, there is going to be a crash. And the only way to win will be to make sure you don’t… and that you’re ready with exactly the stocks you want to buy that can make you rich…
This is why, as part of my investment advisory service – Braden Copeland’s Building Wealth – I’ve created a special report called “Open in Case of Emergency.”
Inside, you’ll find details of exactly how to prepare for the next stock market crash,including six specific stocks to buy when the next crash comes.
I explain in detail why these stocks are the ones you must buy… and show you the research on how I arrived at them and why they can lead you to fantastic future income. (And, by the way, the six stocks are not ones you’d expect.)
P.S. “Open in Case of Emergency” is your plan for when this game of Chicken ends. Do yourself, and your future, a favor. Take advantage of this special offer right now and see what’s inside “Open in Case of Emergency” risk-free.