The economic data coming out now is really quite dismal. What appeared to be a reasonable, if unspectacular, recovery is now in serious doubt. Even more notable is that the economy remains this weak despite all the trillions in stimulus and Fed balance sheet expansion.
The stock market reacted badly to the news, shedding roughly 1.5% on each index, with the Dow closing below the big, round number 12,000.
Here are my thoughts and observations about the past week’s stock market performance and recent economic and monetary news that drove the recent losses.
A Liquidity Gauge Above All Else…
The stock market is considered by many to be a great discounting machine, but I think of it first and foremost as a liquidity gauge. If the Fed dumps a bunch of thin-air money into the system, it has to go somewhere, and one of the favored places is the stock market.
This week was notable in this regard because the Fed broke new ground in its “readiness program,” which is the exact reverse of the thin-air money printing program. In the readiness program, debts are moved off of the Fed balance sheet and back out into the financial system in exchange for cash. This program drains liquidity from the system rather than adding it.
Here are the Fed’s liquidity activities on Friday, a day they like to have stocks finish strong going into the weekend, for the past 9 weeks:
- 4/15 (Friday, as are all the dates that follow): +$6.358 billion
- 4/22: None
- 4/29: +$6.679 billion
- 5/6: +$6.676 billion
- 5/13: +$6.940 billion
- 5/20: +$6.940 billion
- 5/27: None
- 6/3: +$6.939 billion
- 6/10: Minus $2.91 billion
The typical Friday add was over $6 billion and this Friday’s ‘add’ was actually a subtraction of nearly $3 billion dollars. This was the largest such drain to date. The stock market hated it. I’m thinking the Fed noted that with some concern.
The Dow closed below critical support (blue line) but is due for a bounce (green circles). I don’t think we’re in crash territory here, and will probably rise back up to test that support line and the big, round number a few times; but the trend is down, and the lack of liquidity coming at the end of June, coupled with good, old-fashioned economic weakness, is quite unfavorable for stock market advances over the next few months.
by cmartenson 
