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In the Money

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Are you impressed by the strength of the U.S. stock market? After a mini correction that took the S&P 500 down 7% from its recent high, stocks have almost recovered all of their losses. This, despite the ongoing turmoil in the Middle East, a still uncertain outcome to Japan’s nuclear tragedy, a flare-up in the European debt crisis, an unmistakable double-dip in U.S. housing, and surging food and energy prices. Yes, the strength of this market is impressive, but not at all surprising. As I’ve written previously, the market is focused almost exclusively on one variable, and that variable is U.S. monetary policy. 

Regardless of how foolish a strategy it may be, the Fed is now explicitly using the U.S. stock market as a monetary policy tool. Read some of Federal Reserve Chairman Ben Bernanke’s recent remarks or pull up some video of him on YouTube. The Fed Chairman boasts about monetary policy fueling a rally in the stock market and refuses to rule out more stimulus. Ben B. wants enough dry powder in case this artificial stock-rally falters. It’s the Bernanke put. And what good is a put if there is no collateral to back it?  

Savvy investors understand what the Fed is doing. The speculative among this group are the folk bidding up stocks. They apparently believe the Bernanke put was in the money at the recent low of 1256 on the S&P 500. For those of you who don’t trade options, that means Bernanke would have started printing money if the S&P stayed at 1,256. The more conservative folk who recognize what the Fed is doing are, or should be, taking a more cautious approach. You can count me in the conservative camp. I’m not joining the speculators. Why not? Because, like all options, the Bernanke put has an expiration date. And nobody knows for certain when that date will come. Those who wager wrong may suffer a serious blow to their wealth. Good investing

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Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.