Stocks are up 108 percent during the Oval Office tenure of Barack Obama, but that’s not necessarily a good thing.
How is that?
According to Mohamed El-Erian, who once managed Harvard’s endowment and is the former deputy director of the International Monetary Fund, it’s because good news becomes bad, and vice versa.
“Good news is bad news for the markets,” he said in a recent television interview. “It questions the Fed commitment to continue to support the markets.”
In other words, while the U.S. Federal Reserve, the semi-secret private organization that largely runs the U.S. monetary policy, is pumping billions of dollars daily into the currency market, investors are confident, and the markets boom.
When the Fed doesn’t pump dollars in, or even suggests that it might taper off the activity, investors fret that there isn’t enough support for the markets, and numbers plunge.
Bloomberg reported Obama “is enjoying one of the best stock markets for a re-elected president.”
“The index has climbed 108 percent since Obama became president, adding more than $10 trillion in equity market value,” the report said. “Record Federal Reserve stimulus, interest rates around zero percent and doubling of corporate profits since they fell to a five-year low in 2008 helped sustain stock increases under Obama. The rally that began just after he took office now exceeds the average length of bull markets by almost a year and valuations are up 18 percent in 2013.”
But with the “quantitative easing” that has been going on in parts one, two and three, more than $4 trillion has been printed up by the Federal Reserve and passed out – setting off alarms for critics and even supporters.
Bloomberg noted the “outlook for further gains under Obama is grimmer.”
“The president came in at a highly unusual time with markets in complete disarray,”said Chad Morganlander, a New Jersey-based portfolio manager at Stifel Nicolaus & Co.
His company oversees about $130 billion.
“After the rally this year, we’re fairly valued at best. The next stage of this will have to be an improving economic outlook and earnings outlook well above where we stand,” he told Bloomberg.
Added Mark Luschini, chief of Janney Montgomery Scott LLC, in the report: “It’s unusual that we’ve gone so long without at least a correction. If you just look at this from a valuation perspective, the market is rich. That doesn’t mean we have to crash, but it does suggest that going forward, your return assumptions for U.S. equities should be much more muted than they have been.”
The first two injections of money into the economy were about $2.1 trillion and about $1.6 trillion. The amount to which the Fed has committed so far continues to rise at the rate of about $85 billion a month.
In the Bloomberg report, Greenwood Capital Associates chief investment officer Walter Todd said: “Clearly earnings growth has been slowing. We’re going to have to navigate that slowdown in earnings and monetary policy things like tapering.”
CNN reported: “Most of the money created by the Feds is gathering dust in bank reserves and has not been making its way out to Main Street. Since the Fed launched its latest bond-buying program in September 2012, bank reserves have increased by about $800 billion, whereas the currency circulating in the economy has increased by only $80 billion.”
Catherine Mann of Brandeis University told CNN: “Asset prices are higher than they should be based on fundamentals. Companies are making profits, but they’re not making profits off of higher sales – they’re making profits off of constraining costs and particularly labor.”
The CNN report warned: “The longer QE continues, the more dramatic stocks could fall once the end of stimulus is in sight.”
The Wall Street Journal said one result of the “easing” is that the value of the dollar is falling against such currencies as the yen.
Barry Sternlicht, of Starwood Capital Group, said recently that the “easing” is getting to be like an addiction in the U.S.
“This is bad. This is a heroin addiction. It’s gonna get – the more you get on it, the worse it’s gonna get,” he said.
Other scholars fear runaway inflation once the direction of the economy does change.
A report from the Global Times suggested the $85 billion per month buying spree is being continued because under Obama’s economic policies, the U.S. economy was on the edge of “deflation.”
“I continue to believe that the benefits of QE are no longer significant and that the low level of interest rates is driving investors and banks to take undesirable risks. In these circumstances, the Fed should move swiftly to end its long-term asset-purchase program,” wrote Martin Feldstein.