The initial reaction from QE4 was also tepid, but stocks reigned in the new year and money printing with gains across the board. In fact, it was the best January for the Dow since 1994 and the best for the S&P 500 since 1997. Both indices posted their best single-month performance since October 2011. According to TrimTabs Investment Research, nearly $80 billion flowed into stock mutual funds and exchange traded funds in January, the best monthly haul in at least a decade.
The momentum in stocks carried over into February as the Dow Jones Industrial Average recaptured the 14,000 level for the first time since October 2007. While reaching the old milestone is generating a debate about a great rotation from cash to equities, it is important to remember that the rally should be credited to central banks rather than improving fundamentals.
Mohamed El-Erian, chief executive officer and co-chief investment officer of Pimco, explains in a Fortune article, “Unfortunately, politicians both here and in many countries around the world seem more comfortable in – time and time again – kicking the can down the road rather than deal properly with economic challenges. Indeed, if it weren’t for the unusual activism of central banks, the Dow would be well below 14,000 today – well below. Also, the housing recovery would be less advanced and companies’ balance sheets banks less healthy; and many of the banks fortunate enough to be still operating would be struggling to restore large capital cushions and decisively overcome bad legacy assets on their balance sheets.”
Main Street is not feeling the wealth effect…