‘Stodgy’ central bankers move markets
In the great 1990s bull run, stock gurus such as Abby Joseph Cohen of Goldman Sachs and rock-star analysts such as Mary Meeker moved markets. Now, stodgy central bankers move the tape on Wall Street.
Ever since the 2008 financial crisis, the direction of stock prices has been greatly influenced by the words and actions of the world’s top bankers, such as Federal Reserve chairman Ben Bernanke and Mario Draghi, the new president of the European Central Bank. Central bankers, thanks to their ability and willingness to help sick economies get better by injecting various forms of stimulus into the financial system, are viewed by investors as a lifeline.
Indeed, every major stock market rally following the big drop that ended in March 2009 — the worst plunge since the 1930s Great Depression — has been fuelled by stimulus administered by the Fed. A big rally followed the Fed’s late-2008 announcement of its first bond-buying plan, dubbed quantitative easing, or QE. Stocks also rallied in August 2010 after Bernanke went public with plans for QE2 and in fall 2011 when the fed announced Operation Twist, a strategy to lower mortgage rates.
Now, Wall Street has been bidding up stock prices again on the hope that central bankers from the U.S., Europe and China will ride to the rescue again at a time when the global economy is showing increasing signs of deterioration, says Bruce Bittles, chief investment strategist at R.W. Baird. “Central banks are active again,” he says.
Stocks have rallied sharply in recent days in response to a pledge by Draghi to do “whatever it takes” to save the eurozone.
Investors are also hoping the Fed will announce another round of stimulus to help jump-start the stalled U.S. economy when its twoday meeting ends Wednesday or at its next meeting in September.
Analysts also expect China to soon cut its benchmark interest rate for a third time this year.
“To some extent the market is grasping for straws,” says Sung Won Sohn, finance professor at California State University.
“Investors feel somebody has to do something. That is why the only game in town is monetary policy.”