So far 2014 has proved to be quite frustrating and confusing. We ended 2013 on and upbeat note with the Dow and S & P making new all time highs. At the time only 16% of investors were bearish on the market. In December 2013, then Chairman, Ben Bernanke, of the US Federal Reserve started to taper bond purchases by $10 billion per month.
2014 started with a sell off with the markets backing and filling for most of the first quarter. Incoming Chairperson, Janet Yellen, of the Fed continued tapering bond purchases bringing them down to $55 billion per month. As the weeks and months dragged on the sentiment on the Street became increasing bearish. Traders and the media were filled with rumors of an imminent correction. The market continued to weaken further.
Then, when the Olympic Games ended, President Putin of Russia took over the Crimea from Ukraine, setting up strong clashes between the West and Russia. Supply lines were disrupted. Both Europe and Ukraine rely of Russian oil and gas to keep there economies running. This added further downward pressure to the market.
At the beginning to the second quarter, the tone of the market was getting weaker with small rallies followed by two or three days of selling. Good news became bad news. When the jobs report for April was released showing an increase of 188,000 jobs, the market started strong but gradually got weaker as the day wore on, finally ending down 45.98 points in the Dow.
Clearly, something had to be done to reverse the pessimistic psychology. Enter Janet Yellen’s testimony to Congress. As usual she emphasized that the Fed would continue to hold interest rates at a low level going forward. But it was one sentence that turned the markets around. She stated that she DID NOT believe the equities were overpriced. The following week markets started to firm up. Then a new rally started driving the Dow and S & P to new all time highs.
Meanwhile, former Fed Chairman, Ben Bernanke is on the speaker circuit to the big money players. His “get togethers” are priced in the neighborhood of $250,000. He is boldly proclaiming that easy money is here to stay for several years to come, regardless of the unemployment numbers and inflation.
There is an old adage: “When the Fed speaks, be sure to listen.” Janet Yellen’s words that equities were NOT OVERPRICED has set a floor under the market. Short sellers will be more hesitant to sell and existing shorts are being squeezed with losses.
If we look back the dot.com bubble then Chairman, Alan Greenspan, spoke his famous words: “IRRATIONAL EXUBERANCE” to try and quiet the markets down. This lasted for just a few brief weeks. The key question for investors today is whether or not Janet Yellen’s words “NOT OVERPRICED” will also be short lived. Or, will the market turn down again and we will see the correction that was on most investor’s lips during the first quarter?