With the DJIA gaining .08 percent, closing higher for the 6th consecutive day; the S&P500, up .39 percent, posting its 5th gain in a row; and the NASDAQ’s plus .06 percent, scoring its 4th successive increase, the averages went on with the unique situation of uneven daily, patterns. Accordingly, no historical comparison is possible since no other such situations can be found in our 1950 on data base.
Commentators and news readers have called on many different ’causes’ to explain the market’s run-up, which scored its largest advance yesterday. Yet their focus fails to consider appropriately the Fed announcing its intentions to purchase billions of dollars of outstanding Treasury bonds.
Whereas these so called ‘open market operations’ have been the Fed’s most effective monetary policy tool for many years, their immediate impact is to enhance the value of existing assets. Therefore, while the eventual result of the Fed’s purchase of existing Treasuries should lead to the higher employment, output and income, causing higher business earnings in the future, that underlie higher stock prices, the instant result is higher prices for all assets.
The simplest explanation for the immediate higher asset valuations uses the higher demand for existing assets, caused by the Fed’s purchases, to rationalize this result. Since almost all asset prices are tiered, as an accordion, to each other, then, they all increase, almost simultaneously, once the bottom, basic Treasury rate declines.
DJIA .08 percent
NASDAQ .06 percent
S&P500 .39 percent