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May
17
Jonathan Yates
Analyst Sees a 10% Drop Looming: will Central Bankers Allow for It?
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In a research report just released, Sam Stovall, Chief Economist of S&P Capital IQ, warned of an 8-10% drop in the stock market.

In the note to clients, Stovall wrote that, “Being called “high end’ is usually good when referring to autos, wines or watches, but not to stock market measures, as reported in an article in USA Today by Adam Shell, “Doomsayers no soothsayers.” While the Standard & Poor’s and Dow Jones Industrial Average are up double digits for 2013, it is difficult to imagine central bankers around the world, particularly Federal Reserve Chairman Ben Bernanke, allowing for a sustainable double digit slide that Stovall warns could be coming.

Since 2007, led by Bernanke, global central bankers have created trillions of dollars in an effort to recapitalize the financial system.  This has been done through quantitative easing measures, which entail central bankers expanding their asset sheets to buy securities that no other investors, either foreign or domestic will purchase at the present low interest rates.  This effort, as detailed in a recent article on this site, has allowed for the stock markets to rally over disappointing news.

Bernanke has pledged that these interest rates will remain until at least 2015.  His goal is a substantial drop in the unemployment rate of the United States, which is nowhere near his target level.  There is no reason to expect quantitative easing to case in the United States until that goal has been reached.  At present, this effort, known as Quantitative Easing III, entails the Federal Reserve purchasing $85 billion in Treasury bonds and mortgage-backed securities on a monthly basis, about one trillion annually.

Since quantitative easing began in the United States, the balance sheet of the Federal Reserve has increased from around $700 billion to over $3 trillion.  These are “assets” that no other investors wanted or the Federal Reserve would not have been forced to be the buyer of last resort.  It is doubtful if Bernanke will back away from this massive commitment to let the markets recede from the impressive advance of 2013, as shown by the chart below.



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