Easy-Money Addiction Could Hurt Performance
Excerpt:
The big question worrying investors today is how markets will react when the Federal Reserve starts trimming its stimulus program, something that could happen as soon as this year.
The answer may not be that hard to figure out. The Fed has cut back on stimulus twice before in the past three years. Each time, the market hated it. There is every risk it will hate it again this time.
Investors cling to stimulus in part because it involves tens of billions of extra dollars injected directly into markets each month. It is a very welcome drug. And like addicts, markets have developed something resembling a dependence.
“I’ve heard a lot of methadone analogies the last few weeks,” says Russ Koesterich, chief investment strategist at BlackRock Inc…
The first time the Fed pared stimulus, in March 2010, the Dow Jones Industrial Average responded with a 14% drop between April and July. The second time the Fed pulled stimulus back, in June 2011, the Dow moved in anticipation, slumping 17% from April into October.
Each time, the market recovered only after the Fed sent signals that it would resume stimulus. Late last year, the Fed actually expanded its stimulus program and the Dow reacted by rising 14% so far in 2013…
Full article: Easy-Money Addiction Could Hurt Performance – MoneyBeat – WSJ.
