Sunday, April 8, 2012

Markets Disappointed by Signs of Recovery?

This week's equity market losses have been attributed, to a large degree, on fed meeting minutes indicating further economic stimulus is not warranted. An article from Bloomberg, here, provides the basic message.  According to the media, the market logically sold off upon hearing this news, as further stimulus was unlikely.

First, I have to point out that I am skeptical of singular causes for market activity described by the media.   Due to the complexity of the market and the interaction between multiple sources of information and expectations, media commentary on market movements is highly specious.

Even if the Fed's comments about stimulus did spark the market decline, I question why such news should rationally cause a sell-off.  Fed stimulus is used to help rehabilitate a struggling economy.  Stimulus is not a standard part of our economy, as evident from opposite actions occasionally adopted by the Fed (e.g. early 1980s), designed to slow our economy.  Given the Fed believes stimulus is not necessary, this should be a positive sign of our economic recovery, and the need for additional stimulus should be worrisome.  All else equal, I would view the Fed's announcement as bullish for our market.

A good analogy here is a hospitalized patient.  When the patient shows signs of of sickness, medication may be warranted.  Similarly, monetary stimulus may be helpful when economy is sluggish.  If I had a friend or family member on medication in the hospital, and were told that he or she would be well enough to come off medication soon, I would view that as promising news for his or her long term health.  I see no reason why the Fed's comments that further stimulus is not necessary would be any different as it applies to our economic well being.

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