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Wednesday morning's market action clinches it: the Fed, by a wide margin, is the largest determinant of asset prices. The U.S. economy continues to limp forward at a consistent pace while any noise from Chairman Bernanke causes huge swings in stock and bond prices.
For all the hype about second half recoveries and the beginning of a new U.S. housing boom, the U.S. economy has done next to nothing. Since the beginning of 2010, year over year (inflation adjusted) GDP growth has stayed predominantly within a narrow band between 1.5 and 2.5 per cent. (see chart)
Asset markets, on the other hand, have shown berserk levels of volatility during the same period.
Yes, corporate profits have climbed and pushed equities higher. But a significant portion of this improvement is a direct result of Fed policy.
The Fed drove interest rates lower, allowed U.S. companies to refinance existing debt at lower levels (reducing interest expenses). Lower rates also made corporate borrowing to buy back shares more profitable which boosted the earnings per share equation by shrinking the denominator.
On Wednesday, a deeply disappointing U.S. GDP result sent equities soaring. In a world without major central bank intervention, this wouldn't have happened – slower economic growth is not conducive to better corporate earnings. But because the weak economic numbers imply that the Fed will continue to intervene in fixed income markets, the S&P 500 climbed.
All of this follows the month of May when the mere hint that the Fed might start to step away caused a global market conflagration. Do we need any more evidence that Chairman Bernanke is driving the bus here?
It might be insane but for now this is the market backdrop we have. I might expect that Wednesday's rally is short lived – once the effects of slower growth are factored into analyst earnings estimates the optimism is likely to wane.
But who really knows? The only certain thing is that any comment from a Fed governor will be analyzed to death, and likely will move asset prices – no matter how innocuous.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .
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Scott Barlow