Why Stocks Keep Shrugging Off Bad News

An observer of the U.S. equity market would have to conclude that it has a strong bullish bias. Despite the weak economy, a clouded earnings outlook, persistently high unemployment and the European Sword of Damocles, the market shrugs off bad news and spikes on anything that can be construed as good news, no matter how tenuous.

The Fed fumbles the ball, the Bundesbank shows Draghi who’s boss, Southern Europe teeters on the brink of something awful--no problem! All news is good news. Girls just want to have fun and the market just wants to go up.

Why is this? Is the stock market irrational? Perhaps, but it is being paid to be irrational.

What is happening can be summarized in one well-worn sentence: Don’t fight the Fed. Since 2007, the Fed has: cut the overnight rate from 5.5% to near zero; grown its balance sheet from $800B to $2.7T; grown M2 from $7.2T to $10.0T ; and driven down 10-year Treasury yields from 4.6% to 1.6%. (For comparison, the Fed has bid up the PE ratio for Treasuries from 22 to 63, not exactly “value” territory.)