Yeasty

There is an old Wall Street adage for investors, “Don’t fight the Fed,” meaning the Federal Reserve bank has a lot to do with the direction of the stock market. If the Fed is reducing interest rates and expanding the money supply, then the stock market should go up … and vice versa. Over the last eight months we have seen a perfect example of this working in Japan where its national bank has been engaged in this very process, it’s own version of “quantitative easing” (QE) … see: The Economist Explanation.  It is basically printing yen to a fair-thee-well while holding interest rates at zero (see: Trading Economics.) The result … the Nikkei 225, the primary stock index in Japan has been quite yeasty … going from 14,000 to 17,900 in just the past eight months, a 29% gain (almost 42% on an annualized basis) … see the chart below:

Nikkei 225

And this has occurred during a period of effectively an economic recession in Japan. Also note that the yen has weakened considerably against the U.S. dollar … going from 102 per dollar to now almost 120 per dollar. This obviously helps the Japanese exporters but does nothing for American investors in Japanese stocks as it has cut into their gains in yen after converting these yen back into dollars.

Now comes the rub. The American stock market has been on a roll ever since the U.S. Federal Reserve Bank started its own QE back in 2009 (see: NY Times Article.) This impetus has also helped the U.S. stock market considerably … boosting the American stock market’s Dow Jones Average from below 7000 to 17900 during this same six year period … also quite frothy ... see the chart below:

Dow Jones Average

The issue then becomes, will the U.S. stock market continue on its extended roll even after the Fed stopped the money supply expansion part of its QE program two months ago? The next shoe to drop will be when it increases interest rates ... maybe next summer.

Personally, I’m not one to fight the Fed …