The More Interesting Battle
Day one of the second half of the year and with the VIX rising yesterday protection has begun to be put in place. We’ll see how far it goes.
The more interesting battle (and the battle that will dictate where prices end the year) is being waged in the bond market. There was unanimous consensus interest rates would head higher in the first half of the year (they of course didn’t) and that consensus is even greater today. The Fed has done a very good job of “encouraging” people to invest in assets (pay little to no interest on savings and therefore move money into assets such as stocks and real-estate). The market is extremely sensitive to this policy and any change from this policy is likely going to send stock prices lower.
Until the Fed changes though, stock prices will move based on the current Fed policy, not short-term fundamentals (yes, agreed, prices don’t reflect the fundamentals), nor regional skirmishes (Ukraine and Iraq are examples of the regional skirmishes the US markets ignored).
I’ve seen this played out a number of times including in 1982, 1987, 1994, and especially beginning in 2009; the Fed often owns this game. It’s not perfect (2003-2005 is an example), but as we head into the second half of 2014, they are main drivers. Everything else out there is simply noise.