GDP Shrinks By 1%; SPX Hits A New Record High
Before Thursday’s open, The Commerce Department said gross domestic product (GDP) slid by a -1% annualized rate in Q1 2014, missing estimates for a decline of -0.4%. Pending home sales rose by only 0.4%, missing estimates for a 1% gain. Meanwhile, the S&P 500 (SPX) hit a fresh record high right after the open. The obvious question is: Why would stocks rally if the economy is literally contracting?
Single Most Important Driver Of This 5 Year Bull Market: Easy Money
The answer is that weaker economic data will (hopefully) cause the Fed to err on the side of maintaining an accommodative (a.k.a. easy money) stance. This reiterates what we have been saying for the past few years, the primary factor of this 5 year bull market has been easy money from the Fed. Don’t take my word for it, just look at the facts (see chart). When QE 1 ended the S&P 500 fell -17% and when QE 2 ended, it promptly fell -21%.
What Happens When QE 3 Ends?
If GDP fell 1% with the Fed is printing billions of dollars everyday to stimulate both Main St & Wall St, the real question is what will happen when QE 3 ends? There are two outcomes: either the patient (economy) can stand on its own two feet and grow when the meds are taken away (QE ends) or the Fed will announce another round of QE and give the patient more time to “heal”….As always, we’ll let the market decide…
SPX vs QE