Wall Street is playing coy about the current advance in the major averages. Anyone with a lick of sense has to know that the stock market is the only game in town with a very accommodative Fed ensuring that short-term rates will remain low. While the bond market has backed up the rates on longer-term Treasuries and lower-rated corporate bonds do offer some enticing yields, the Bernanke Put almost guarantees, for the near-term anyway, that the returns in the stock market will be higher than those attainable in fixed-income assets.
While the Fed did offer a moderately upgraded economic assessment in its most recent post-meeting statement, it appears that they still aren’t seeing what they want from the labor markets: “The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.”
Ditto for the Fed’s view on inflation: “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”
I know the Fed has its own method of measuring what they believe represents inflation, but whatever it is it diverges widely from my more simple metric; my grocery bill. With five children (yes, I do have a television), the Wright family buys in bulk at a well-known warehouse chain. Even with warehouse prices, I can tell you my average bill is at least 10% to 15% higher than this time last year.
As a resident of the great State of California, I also have the privilege of paying more for gasoline than the rest of the country because of air quality regulations that require our own gasoline formulations.
In short Virginia, inflation is alive and well.
None of this is lost on the stock market; it just doesn’t care. With the extension of income-tax policy for two years and the possibility of QE3, 4, 5, and however many QE’s the Fed feels it needs, the market knows the wind is at its back and has every intention of wringing out as much as it can until the music stops.
The thing is, however, it’s all an illusion. Sure, the market averages have gone up; where did you think all that liquidity would go? It isn’t organic though and it isn’t sustainable.
The last time the Dow and S&P were at current levels was in June of 2008. With Dow 12,000 a foregone conclusion, it is obviously time for the small investor to get back into the market.
Oil is going higher. It may not happen this year but a run at the all-time high of $150 per barrel is in the cards. The bond market thinks the Fed is behind the curve on inflation and is pushing long-rates higher. This is a tough one-two punch for the economy, and the markets, to ignore forever. If the sovereign debt issue in Europe rears its ugly head again it just might be the game-ending triple play.
