Back on October 29, 2014, the Federal Reserve ended its largest round of quantitative easing (QE3/QE4). The unconventional policy of buying market-based assets with electronically created credits (dollars) first began in late November of 2008. Since that time, $3.75 trillion in stimulus forced interest rates downward and sent stock prices soaring. The S&P 500 moved from 857.39 when QE1 was first announced to 1982.30 when QE3/QE4 ran its course for an approximate gain of 131%.
Equally intriguing, when the Fed backed away from its asset purchasing rate manipulation, stocks struggled mightily. The S&P 500 fell 16% in a sharp pullback shortly after the end of QE1. What’s more, in the period between QE1 and QE2, stocks essentially experienced flat returns.
The same phenomenon occurred shortly after the end of QE2. The S&P 500 fell 19.4% in a bearish sell-off. It wasn’t until the Fed began selling short-term Treasury bonds and buying longer-term Treasury bonds that investors regained confidence in late 2011. Moreover, the period between the end of QE2 and the start of QE3/QE4 yielded very little in the way of gains.
Perhaps it should come as no surprise that – since October 29th of last year when QE3/QE4 ended – the S&P 500 has garnered a modest 2.7%. Other areas of the U.S. stock market have had less success. The iShares Dow Jones Transportation ETF (IYT) has already corrected nearly 11% since the end of QE3/QE4, while the Dow Jones Industrials is in the same place that it started.
As I described in Tuesday’s ‘Market Top? 15 Warning Signs’ – as I discussed in numerous articles throughout May, June and July – extremely overvalued stocks and deteriorating stock market breadth create an unsavory concoction. Mix in a central bank that expresses a desire to hike borrowing costs when the global economy is decelerating, commodities are plummeting and credit spreads are widening, and even the mightiest success stories begin to get victimized.
Time and again, history has shown that when more and more sectors are falling apart, the pressure on the remaining sectors becomes overwhelming. Energy, materials, industrials, transportation – decliners have been pressuring advancers since the beginning of May. Granted, one may wish to pay a premium price for earnings growth in Disney (DIS), Facebook (FB) and Netflix (NFLX). On the other hand, when the number of advancing stocks participating in the bull market continues to diminish (relative to decliners), even the most popular momentum stocks eventually witness a mad dash for the exits.