Blogs & Comment

Economy goes down, stocks go up

Lately, it seems when the economy stumbles, the stock market rallies. The explanation doing the rounds is that deterioration in the economy means the Federal Reserve is more likely to engage in another round of quantitative easing (fancy phrase for printing money).
True, printing money could stimulate the economy. If your street is piled high with bundles of $100 bills dropped from helicopters, you and your neighbours will pick them up and buy 3-D TVs and other goodies.
However, historically, there is usually a lag of 6 to 18 months between pulling the monetary lever and impact on real variables. The stock marketseems tooverlook the lag and often rallies as soon as the Fed signals it’s going to pulls the levers.
But then the economy looks like its still stuck in the mud. This time could be different and some hidden strength in the economy (given all the past policy stimulation) could surface just after the Fed starts pumping again. But in the past, the initial optimism over monetary easing often fadesbefore it takes root, especially as the secularuptrend in debt keeps raising the hurdles.