With the Dow Jones Industrial Average up 57% and the Standard & Poor’s 500 Index up 62% since March, there is plenty to celebrate with a market that has been on a pace not seen since the 1930s. The trouble is, while it appears the economy is on the mend, once the $1 trillion in stimulus money is spent and the Federal Reserve lifts interest rates above zero, it could put a damper on the stock market, many fund managers fear.
As Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, told the Associated Press, “Pretty soon the easy money phase could be behind us.”
And for now, one of the prime reasons stocks have been rising so strongly is because it’s the only place to find positive yields, noted Ed Yardeni, president and chief investment strategist at Yardeni Research. “The Fed is forcing everyone to take risk by buying stocks because if you don’t take risk, you will be earning nothing on your money,” Yardeni said.
Many of his clients, which include institutional investors and pension funds, don’t believe there are sound reasons for the market to rise but feel compelled to invest in stocks because they are rising so fast.
As soon as the Federal Reserve indicates it will reverse policy, it could “take the steam out of this rally. It won’t take much to push this market back down,” Yardeni said.