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.