FED Basically Put $3 Trillion In The Stock Market

Stocks have been bullish despite the slow economic recovery. Stock market has been bullish due to the quantitative easing being done by the FED. All the cheap money that the FED has been pumping into the economy was being siphoned into the stock market.

It took the Fed 95 years to build up a balance sheet of $1 trillion and only six years to go from there to the present level. The Federal Reserve was providing this stimulus to improve the growth of the economy, but it is my view that three quarters of the money injected into the system through the purchase of bonds went into financial assets pushing stock prices up and keeping yields low. If I am right, the Fed contributed almost $3 trillion (some may have gone into bonds) to the $13 trillion rise in the stock market appreciation from the 2009 low to the current level, earnings increases explained $9 trillion (1.5 x $6 trillion) and other factors accounted for $1 trillion. You could argue that the monetary stimulus financed the multiple expansion in this cycle.

So when the FED stops Quantitative Easing as it has said it is doing now, will the stock market tank? When the FED raises the interest rate, will it kill the bull market? The prospect of rate hikes seems to freak out investors, but historical data shows that bull markets in stocks usually keep on trucking along, albeit with some short-term bumps, once the Federal Reserve goes into tightening mode.

Many analysts have been predicting dooms day scenarios for a long time. Might be they get proved right. One of the dooms day scenario painter is Robert Prechter who is considered to be leading Elliott Wave Analyst in the world.   Who is Robert Prechter, and why should investors care that he is warning them to be on high alert for a potential collapse in the stock market?

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