I read a quote in the WSJ today that highlights a major drawback of macroeconomic management as a means of combating the economic malaise that has gripped the American economy.
Macroeconomics seeks to look at the big picture when establishing policies favorable to growth. The current viewpoint is that the Fed will purchase government bonds, driving up the price, lowering interest rates, and expanding the money supply.
Investors are developing an outlook that no matter what happens, macroeconomic policy will be a bailout.
This is the quote that is particularly alarming to me:
"'That's the conventional wisdom of the market now, that if the economic reports are solid, the market will go up, and if they're not, the Fed will do more stimulus and then the market will still go up,' said Phil Dow, director Of equity strategy at RBC Wealth Management."
Yesalavich, Donna Kardos, 2010. Bets on aid from fed help stocks. The Wall Street Journal, Sept. 28.
Missing is the evaluation of expected profits for a particular firm. Investors seem concerned only with frequency trading and shifts in macroeconomic policy rather than a true assessment of equity fundamentals.
I think the stock market will have a hard time moving forward without a better balance between frequency trading, evaluation of macroeconomic effects, and fundamental analysis.
When investors rely heavily on macroeconomic analysis, it is extremely difficult to predict exactly how this will affect individual companies.
I do not believe that a sustained stock market rally is possible based just on the anticipated effects of macroeconomic policy.
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