Fed and the Market — May 21

If you believe that the stock market will/should correlate with GDP or the economy, you are a fool. Fed has already broken the pricing system in the financial market.

Initially, in the market, buyers and sellers pursue to make profits. Buyers try to buy something at a low price while sellers try to sell something at a high price. However, at this time, the biggest buyer Fed does not care about prices because their goal is not making profits. That indicates that markets can sell something at a higher price to Fed.

If market participants make money from Fed, they will buy other products. Some others will buy what Fed is buying. As a result, most financial products’ prices will go up regardless of their valuations.

Whenever Fed people show pessimistic opinions on the economy, markets will be excited because they can expect Fed will continue to buy more. It makes bad news become better than good news.

It means when companies show good performances, traditional good news, the stock prices will go up because the market expects that there will be more demands. If they show bad performances, the stock prices will also go up because Fed will inject more money.

Therefore, you better ignore the original valuations at this time. What you have to care about is only when they stop injecting.