Bloodied
but unbowed, temporarily waylaid by doubts but eternally faithful, the New
Era’s sheep returned to their meadow of dreams, lured back to the tried
and true performers of the day by that contagious little bug
affectionately known as Selective Hearing.
The second journey to the Valley of the
Fed Hawks proved to be a repeat of the last go round, the venerable Fed
leader’s testimony a regurgitation of the prior trip’s sermon, but to
a market that desperately wants to believe that fairy tales do come true,
the hawkish words fell on deaf ears—the gathered crowd instead
gravitating towards the one iota of good cheer that Greenspan tossed its
way: the Fed will not use its iron rate hike hand to swat down surging
stock prices.
Greenspan’s words, " ... we don't
look at stock prices and say they're rising, we have to raise interest
rates…’’ sparked a rally as members of the "20% returns are an
inalienable fact of life" club, secure in their belief that the Fed
had just given the green light to NASDAQ 5000 by March, eagerly piled into
the increasingly narrow band of crowd pleasing technology, Internet, and
biotech stocks that have led the NASDAQ Composite to uncharted territory.
In one respect, those afflicted by the
oft times fatal malady of selective hearing are right: neither a further
expansion of the Internet and biotech bubbles nor the sight of NASDAQ 6000
by Springtime would in themselves cause the Fed to embark on a scorch and
burn mission of euphoria eradication.
Although there is no magic level at
which the Fed members will suddenly jump up and shout in unison,
"Stocks are up! Time to Hike Rates", it is perhaps best to
remember that the Fed will continue to actively fight to tame the
byproduct of rising stock prices: the wealth effect and the increased
demand that accompanies it. In short, a sudden rise to Dow 15000 will not
spur the Fed to act, but the trickle down effects of the wealth effect
that are sure to accompany the surge in stock prices will cause the Fed to
hike rates in an effort to slow demand growth.
Although the NASDAQ’s post
Humphrey-Hawkins record setting rally produced a noticeable calm on the
previously jitter infested streets of our little village on the Hudson, we
were not among those who felt a sense of relief –we were too busy
quaking in our boots at the sight of Goldilocks (the NASDAQ Composite’s
record high) and the Three Bears (the Dow Industrials, Transports, and as
of yesterday, the Utilities) arriving in town simultaneously. Our jitters
only grew as we watched in awe as the NYSE Advance/Decline line tumbled to
a new low, and winners edged out advancers by a narrow margin of 21-19 on
the NASDAQ despite the record point gain by the index.
While divergences do not signal an
immediate end to the days of wine and roses, the recent acceleration in
the growth of the chasm between the market’s haves and have-nots does
bear watching. As we have previously opined, strong inflows will likely
keep the narrow band of crowd-pleasing stocks aloft until mid-April, but
the deadly trio of an inhospitable Fed, growing divergences, and the
annual post-April 15th slowdown in money flowing into the market could
prove to be a deadly combination for many of the high flying stocks that
are currently riding on the crest of a bubble of epic proportions.
