(November 7, 2013) — The Federal Reserve’s aversion to fulfil the quantitative easing (QE) tapering promise has led to an equity market rally similar to the one seen in 1999 when it moved to quell panic over Y2K, Guggenheim Partners’ CIO has said.
Scott Minerd believes there are blatant similarities between the current actions of the US central bank and its efforts 14 years ago when it increased its monetary base by 12% to help quell fears of an entire technological blackout.
“In the present era of QE-to-Infinity, a 12% increase in the monetary base may seem insignificant,” said Minerd. “But at the time, the liquidity injection helped fuel a massive melt-up in stocks. The Nasdaq, for instance, saw an 85% gain between September 31, 1999 and March 10, 2000, crashing 72% by the third quarter of 2001 as the tech bubble popped.”
Minerd does not predict such momentous rises again—though points out that neither did the market in 1999—but said “the bottom line is that we are awash in liquidity and heading into a seasonally strong period, indicating a significant risk of a melt-up”.
He also illustrated how poor economic data seemed to have pushed up equity prices, with a chart monitoring the correlation between the S&P500 and the change in the Citigroup Economic Surprise Index.
“At a minimum, we could see a wholesale increase in equities, bonds, and high-yield prices despite the declining attractiveness of valuations, which should cause investors to exercise greater caution,” said Minerd. “The looming transition at the Fed from a Chairman Bernanke to a Chairman Yellen will likely only add to uncertainty during the first quarter of 2014.”
To read Minerd’s full blog, click here.
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