18 Sep 2013
S&P holds on to near-record highs, can corporations learn to live without cheap credit?
FXstreet.com (London) - US stock indices have struggled to add to recent gains ahead of this afternoon’s Fed speech, having been given a boost by Larry Summers replacement as front runner for the Fed chairmanship by Janet Yellen. The S&P currently trades at 1,705.38. December S&P futures yesterday threatened August 2 record highs of 1,705.69, topping out at 1,705.62.
The S&P has been in a huge bull market rally since its March 2011 low of 683.38. The equities market has been fuelled on by a flood of cheap money from the Fed. With the Federal Reserve artificially depressing bond yields through its successive asset purchase programmes, cash has poured into the equities market in a hunt for yield.
Recent equity market gains have not been on the prospect that the Fed will be decreasing the rate at which it buys up assets, but instead that it will be decreasing at a lower rate than previously feared. As has been much repeated: “tapering is not tightening”, and tapering at a slower rate is even better.
Stock markets have the double whammy of corporations being offered artificially low interest rates to borrow, while a low-yielding bond market drives investors into the stock market, with negligible or negative real rates of turn on cash. Any significant change to this situation could be disastrous to US and global equity markets.
Cheap credit must end one day
Historically, US corporate profits have run at 6 percent of US GDP. They currently run at 10.5 percent, breaking out of historical trend channels with the introduction of the first round of QE from the Fed (Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj) (CPATAX) – St Louis Fed).
Markets have been sensitive to any potential for overly hawkish tapering in recent weeks, swinging down to 1,630.48 on August 26, and rebounding to its current 1,700-plus levels. The last two days the market was given a boost when the hawkish Larry Summers was replaced as favourite in the race to succeed Fed Chairman Ben Bernanke, after Summers resigned following hostility to his nomination from the Democratic caucus. The new front runner, Janet Yellen is seen as a much more dovish alternative, in the mould of Bernanke, and as a result less likely to turn off the Fed taps too quickly and reduce cheap credit to the markets.
But at some point the Fed is going to have to conclude its tapering programme, and begin to tighten its monetary policy. The question is, can equity market learn to live without cheap credit?
The S&P has been in a huge bull market rally since its March 2011 low of 683.38. The equities market has been fuelled on by a flood of cheap money from the Fed. With the Federal Reserve artificially depressing bond yields through its successive asset purchase programmes, cash has poured into the equities market in a hunt for yield.
Recent equity market gains have not been on the prospect that the Fed will be decreasing the rate at which it buys up assets, but instead that it will be decreasing at a lower rate than previously feared. As has been much repeated: “tapering is not tightening”, and tapering at a slower rate is even better.
Stock markets have the double whammy of corporations being offered artificially low interest rates to borrow, while a low-yielding bond market drives investors into the stock market, with negligible or negative real rates of turn on cash. Any significant change to this situation could be disastrous to US and global equity markets.
Cheap credit must end one day
Historically, US corporate profits have run at 6 percent of US GDP. They currently run at 10.5 percent, breaking out of historical trend channels with the introduction of the first round of QE from the Fed (Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj) (CPATAX) – St Louis Fed).
Markets have been sensitive to any potential for overly hawkish tapering in recent weeks, swinging down to 1,630.48 on August 26, and rebounding to its current 1,700-plus levels. The last two days the market was given a boost when the hawkish Larry Summers was replaced as favourite in the race to succeed Fed Chairman Ben Bernanke, after Summers resigned following hostility to his nomination from the Democratic caucus. The new front runner, Janet Yellen is seen as a much more dovish alternative, in the mould of Bernanke, and as a result less likely to turn off the Fed taps too quickly and reduce cheap credit to the markets.
But at some point the Fed is going to have to conclude its tapering programme, and begin to tighten its monetary policy. The question is, can equity market learn to live without cheap credit?