Todd Harrison: What happens to stocks without the stimulus crutch?
The Federal Reserve released the "minutes" from its most recent meeting this week and hinted that the punch bowl of synthetic stimulus may soon be removed. Given that financial assets have relied on this "fix" since the first phase of the financial crisis, Wall Street was none-too-pleased.
Equities are enjoying their best start in fifteen years, although many will argue that there is a difference between a stock market rally and an economic recovery. The government has infused upwards of $10 trillion into the economy since the financial crisis began - a staggering number - and it remains to be seen what will happen when that crutch is removed.
The timing of the Fed's news - or the hint thereof - arrived at an interesting juncture: The NASDAQ had been riding an eye-popping rally of 27% since mid-December when the hint of a halt to the stimulus was revealed. This is notable not only on an absolute basis, but on a relative one as well.
The NASDAQ, as measured by the price action on a weekly basis, had ratcheted higher for thirteen consecutive weeks. The last two times that happened was in October 1998, when - after eleven "up" weeks in a row - the tech sector suffered a three-week 13% correction. The other was in October 1999, when after ten "up" weeks in a row, the NASDAQ was scorched by a one-week 10% correction.
In both instances, the rally eventually resumed (in the latter matter, it was a function of the liquidity infusion in front of the Y2K scare-anyone remember that?) but not before the bears scared the sprinkles out of the then-complacent bulls. Past performance is no guarantee of future results, but when it comes to the system formerly known as free-market capitalism, we may soon be reminded that it's not wise to mess with Mother Nature.
Todd Harrison is the author of "The Other Side of Wall Street" and the founder and CEO of Minyanville, an Emmy Award-winning financial media platform. Read him daily at www.minyanville.com.