The Fed’s Impact on Market Psychology

Matthew Claassen, who runs an institutional research shop, Claassen Investment Research, is one of the reasons I started studying for the Chartered Market Technician. I found pieces of Matthew’s research a few years ago and he spent some time talking to me about cycles, technical analysis, and the CMT. He has made some notable market calls, including the top and bottom of the Dot-Com bubble as well as the top in ’07 and bottom in early ’09. Matthew doesn’t publish his research for public consumption very often, but when he does it’s always something I enjoy reading.

Claassen recently wrote a piece over at Seeking Alpha about the similarities in market psychology between the late 1940’s and today. He discusses the cycle patterns of the equity market and how the current leg-up is nearing the average life span of an advance and the current headwinds that are keeping investors from putting more money to work in stocks. He goes into how the Fed’s intervention in the capital markets has created a distrust of the currently rally. As long as investors believe the Fed unloading its balance sheet will have a negative impact on the market (hard to argue with them) then they will not participate in the ‘risk on’ advance in stocks, which could prevent a second leg to the secular bull rally we are currently in.

Here’s a blurb:

How many times and how many pundits have been heard in past months espousing that the Fed’s open-ended monetary policy “will end badly?” This is the very real fear investors are faced with despite all time new highs in the Dow Jones Industrial Average and Nasdaq Composite, and identical to the investor sentiment of the 1940s. As was in 1946 relative to the Stock Market Crash of the early 1930s; investors do not have faith that the equity price trend will continue, and they fear a repeat of the 2007-2009 or 2000-2002 bear trends. That fear is based on the near universal understanding that without the Fed intervention, equity prices would be substantially lower. As Friedman observed of the 1940s; as long as this belief persists, investors will, for the most part, continue to hold large cash reserves and choose Treasury bonds over equities. Most of their money is not leaving the sidelines anytime soon.

The article is fairly long but well worth the read.

Source: Here’s What Happened The Last Time The Fed Owned All Outstanding Treasuries (Seeking Alpha)
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