Chart comparisons predicting the next major market crash have abounded as of late. Is this a repeat of 1929, 1974 or 1994? The truth is that we are all guessing at what will happen next in the markets and no one really knows what will happen tomorrow much less six months from now. I say that because I want to qualify today’s chart because the market is behaving very similarly to what we witnessed beginning in late 2010.
What is interesting about the chart above is that in late 2010 the markets were rising strongly as the Fed’s second quantitative easing program was fully engaged. Complacency among investors was high as the economy plugged along. Much the same as we are witnessing currently. Then, in March of 2011, the Japanese trifecta of economic disaster struck as an earthquake caused a tsunami which led to a nuclear plant chain reaction. The only thing missing was a 90 foot tall lizard sending citizens fleeing from the city.
The domestic economy was quickly impacted by the shutdown of Japanese manufacturing. Economic data began to wane at the same time as the Fed’s liquidity program approached its early summer expiration. As the market anticipated the reduction in liquidity flows from the Federal Reserve, stock prices began to struggle. However, for a while they managed to hold above important support. Then, in the middle of summer, President Obama squared off with Congress over a heated debt-ceiling debate. Threats of a government default filled media headlines while market participants watched helplessly from the sidelines. While there was never any real threat of a default, as witnessed by the plunge in U.S. interest rates to record lows at the time, the markets plunged sharply over just a few short weeks causing investors to flee for safety.
That was then. Interestingly, we are currently witnessing similar events.Â
The Fed is once again tapering their current liquidity program. The most recent commentary from the Federal Reserve suggests that the current path of reduction in bond purchases will continue which suggests the program will end by October, 2014.
