According to Wall Street wisdom, "Fed" stands for Financial Emergency Defeater. When the US economy hangs in the balance, only the Federal Reserve can keep things afloat via an accommodating monetary policy and other strategic emergency measures.
You need only look as far as these March 2010 news items to see how much confidence the mainstream has in the central bank's market-manipulating power:
- "US Stocks traded at 17-month highs amid ongoing cheer over the Federal Reserve sticking with its stance that should keep borrowing costs at record lows for much of the year. Each FOMC meeting that keeps this language intact gives investors 12 weeks of stability." (MarketWatch)
- "US stocks finish higher as Fed gives markets lift."(CNBC)
- "Wall Street Gains after Fed holds benchmark rates near zero." (Reuters)
There's just one problem with this idea: namely, it has no basis in reality. Truth be told, there is no consistent correlation between a loose lending environment created by the Fed and a rising stock market.
On this, EWI president Bob Prechter conducts an exhaustive investigation into the real relationship between interest rates and stock prices over the last century. His groundbreaking conclusions are then revealed in Part One of his February-March 2010 Elliott Wave Theorist.
In Bob's own words:
"Economic theory holds that bonds compete with stocks for investment funds. The higher the income investors get from safe bonds, the more attractive is a set of dividend payouts from stocks, [and vice a versa.] A statement of this construction appears sensible, and it would be if it were made in the field of economics. For example: 'Rising prices for beef make chicken a more attractive purchase.' In the field of finance, such a statement flies directly in the face of the evidence."
To the side of his commentary, Bob shows this close-up of the history of the four biggest stock market declines of the past 100 years and continues:
"In ALL of these cases, interest rates fell and in two of those cases, they went all the way to zero! In those cases, investors should have traded ALL their bonds for stocks. But they didn't; instead, they sold stocks and bought bonds. To conclude, events and conditions do not make investors behave in any particular way that can be identified. Economists who assert a relationship (1) believe in their bedrock theory and (2) never check the data."
In the end, the Federal Reserve will react to long-term changes in the market that have already taken place. Anticipating those changes is the function of socionomic theory.
So, what are you waiting for? In the complete, two-part February-March 2010 Elliott Wave Theorist, Bob Prechter uses socionomic insight to debunk NINE other widely held economic claims that similarly mislead investors into the dark.
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