The stock market is a forward thinking entity. Stocks can and do move based on daily news but the longer-term trends are usually started based on what the institutional community believes will happen 6 to 9 months out. This is why many new bull markets normally start while the economy is still in a recession and vice versa.
We are coming up on a major change in January, 2014. This change will have a significant impact on the economy and the markets; if not short-term, surely long-term.
In January 2014 it is expected that we will have a new Federal Reserve Chairman. Ben Bernanke has left his mark, good or bad only time will tell. What we do know is in the last 3 years the market has not responded well when Dr. Bernanke wasn’t throwing money at the economy. After the end of both QE1 (quantitative easing) and QE2, the S&P 500 dropped approximately 20%, respectively. After QE3, the S&P 500 was down 9% until Dr. Bernanke started his new round of unlimited treasury purchases.
So what if the new Chairman doesn’t believe in all this easing? That appears to be the case with Larry Summers as the frontrunner for the position. He definitely has his critics so it is not a done deal, however, he is considered the frontrunner and it will be a surprise if he isn’t named the new Federal Reserve Chairman.
The question is how will investors react to this once it becomes clearer? What happens when all the easing stops? No one knows at this time. Dr. Bernanke, President Obama, and almost every investor hope that the economy is on such solid ground that there will be no significant impact short-term at that point. Will that be the case is yet to be determined. The bad news is the easing continues at this point. The good news is it appears to be ending soon, whether by Bernanke or someone else.