You’ve heard the old saying that no two financial market periods are ever exactly alike, but they do “rhyme”. Of course this characterizes the fact that human decision making is repetitive over time; hence there are certain rhythmic similarities in historic financial market outcomes. Financial market outcomes that are necessarily dependent on human decision making. One exercise I believe is important in each market cycle is to get a feel for individual cycle rhythm and drivers of that rhythm. As an example, clearly in the current economic and financial market cycle US and global central banker intervention has punctuated directional rhythm of markets throughout. If the following chart does not exemplify this, I don’t know what does.
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Has the rhythm of the financial market mimicked the rhythm of monetary policy application and withdrawal? Almost like clockwork. I inserted the red bars to make a point. At least so far, each round of US Fed money printing (quantitative easing) has had a very positive impact on stock prices, but with diminishing duration of positive impact at each money printing interval. The latest Fed balance sheet experiment that is the current dollar swap arrangement with the European Central Bank (ECB) is now only two months old. The ECB’s balance sheet expansion that is the LTRO (Long Term Refinancing Operation) is now a month old. How long the recent reflationary actions by the US and European Central Banks will positively impact equities remains to be seen. A potential truncated positive impact on equities in the next few months would strongly suggest these interventions are simply no longer packing the punch originally seen early in this cycle, but we’re not there yet so stay tuned. Certainly central bank actions have shaped the rhythm of financial markets. A fingerprint of the current cycle...
... I’ve heard it said by a pundit or two in this cycle that “there are no more free markets, just interventions”. Pretty easy to understand why someone would characterize the prior three years as such, no? In quick summation, undoubtedly one of the key drivers of both financial market and economic rhythm in the current cycle has been global central banker monetary interventions. The message is more than clear and we incorporate this reality into our own decision making.
Personally, I believe another very important rhythmic character point of the current cycle has been the ebb and flow in shorter term investor focus at any point in time between secular (long term and big picture) issues of importance and interim cyclical (shorter term business cycle) acceleration or deceleration in economic statistics and reported corporate earnings. Let me explain...
/Continues... http://www.financialsense.com/contributors/brian-pretti/it-do-not-mean-a-thing-if-you-do-not-got-that-swing
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