Reality is starting to set into the stock market. Just before the Federal Reserve meets, investors are beginning to realize that any new monetary stimulus can’t really help more than what has already been done. The recent uptick in U.S. economic news is making the stock market rethink its recent gains. The Federal Reserve may not employ any new monetary stimulus at all. The spot price of gold has been the biggest beneficiary of recent speculation regarding the Fed. The weakness of the U.S. dollar gave a real boost to oil, gold, and silver prices. Over the very near term (next two weeks), I wouldn’t be surprised to see gold prices pull back to $1,600 an ounce, even though the long-term upward trend is intact. Everything in financial markets rests with the action of Ben Bernanke and the next Federal Open Market Committee (FOMC) meeting mid-September. The stock market will tread water until Ben Bernanke speaks.

In a sense, the Federal Reserve can’t win. Whatever new action it takes, if any, it likely won’t be enough to appease the stock market, and it won’t really do anything to help the Main Street economy. Interest rates are already artificially low and the money supply continues to grow unabated. Buying longer duration bonds helps Wall Street, but doesn’t do anything to help the jobs market.

The stock market has done well this year, largely without the help of the Federal Reserve. The biggest pullbacks the stock market experienced were due to pent-up concerns regarding the sovereign debt crisis in the eurozone. Unsurprisingly, with all the elections going on this year and next, policymakers have been doing their best to contain the uncertainty.

Whatever the Federal Reserve does, it won’t directly stimulate today’s economy. Naturally, it’s important for stock market investors not to fight the Federal Reserve; share prices move with monetary policy. A lot of institutional investors have been very surprised by the stock market’s recent strength, especially betting on new policy action from the Federal Reserve. However, there is no other asset class in which to invest if you want to beat the inflation rate, and with the stock market being fairly priced, investors are buying.

This year is likely to turn out to be a good one for the stock market. Next year, all bets are off. It’s a waiting game until we hear from the Federal Reserve. Whatever results, share prices are going to move.

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