Since the financial crisis, some market pundits have attributed the stock market rally to the Federal Reserve’s extraordinarily easy monetary policy. And most have also argued that these efforts have caused interest rates and the dollar to fall.
Since May, the Fed has begun talking about tapering its monthly purchases of $US85 billion worth of bonds. This initially caused stocks to fall a bit, while interest rates rose.
But yesterday, stocks fell while interest rates also fell, a sign that investors were rotating out of stocks into the safer fixed income asset class. This all occurred while the dollar fell.
Art Cashin, UBS Financial Services director of NYSE floor operations, thinks that this may be telling us something about the state of the U.S. economy.
From this morning’s Cashin’s Comments (emphasis):
Pattern Recognition And A Possible Ponder For The Weekend — All week, we have been pounding the table about the pundits pushing “taper talk” as the cause for stock weakness. I have noted, again and again, that the “pattern” was inconsistent. Taper talk would put pressure on stocks but it should simultaneously raise both yields and the dollar. The opposite of the latter two has been happening.
So yesterday, as I watched the yields on bonds move lower despite a mediocre auction, I re-examined the pattern.
What could cause stocks and yields and the dollar to all weaken simultaneously?
One possibility might be a real weakening of the economy. That certainly would weaken yields and the dollar as the Fed would abandon tapering. But, what about stocks? They would only weaken if the slowing would be significant enough that tapering would offer scant help. Is there a pattern? Is there a knowing message? Way too early to tell but worth marinating an ice cube or twelve while pondering.
That’s not encouraging. Maybe it was a one-day thing.
Today, the dollar is picking up.