The Independent Market Observer

Policy Maneuvers Losing Power to Steer the Markets

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 10, 2015 2:55:00 PM

and tagged Commentary

Leave a comment

FederalReserve_4Every year or so, I do a postmortem of my analyses and predictions in order to figure out where I was wrong, and how to avoid making those mistakes in the future—a useful, albeit uncomfortable, exercise. One of the biggest mistakes I’ve made in the past decade has been to underestimate the power of governments to influence markets.

In the aftermath of the financial crisis, for example, I stayed bearish for too long, not recognizing the will and ability of the Federal Reserve, among others, to change the rules and also the outcomes. While I had focused exclusively on the economics, politics was ultimately the controlling factor.

Since then, I’ve been much more bullish in response to the global policies that continue to drive economic and market expansions. Recently, though, I’m seeing a growing need to refocus on economics.

Policy takes a backseat, here and abroad

The U.S. Domestic policy, although still very expansionary, is now shifting to a more neutral stance. At the same time, we’re seeing slowing in many economic indicators, which suggests that the effects of earlier policy decisions may be starting to fade. With flagging growth and a Fed set to begin raising rates, economic factors should return to center stage.

China. Looking abroad, the Chinese government has been very successful in stimulating and managing its economy, but we’ve all seen its recent stock market woes. Although Beijing appears to have stopped the hemorrhaging for the moment, the extreme nature of its latest policy actions suggests that such moves are largely played out. The fact that economic growth failed to respond to the last round of stimulus also suggests a limit to the government’s control. Economics has returned as a constraint in China.

Europe. In Greece and Europe as a whole, politics is also giving way to economics. The new Greek reform proposal is reportedly almost identical to the one its creditors last put forth; despite the political “no” in the Greek referendum, Greece has apparently been forced to face economic facts. And it goes both ways, of course: the creditor countries are now recognizing economic reality by talking about debt relief. 

Politics and policy are still part of the mix, to be sure, and I won’t make the mistake of ignoring them again. But economic limitations are becoming increasingly apparent across the board.

Shift in focus could make for a bumpy ride

In the U.S. and the rest of the world, future growth will have to come from fundamental improvements rather than policy legerdemain. Central banks, which have supported markets for the past several years, will no longer be able to levitate. Monetary policy and debt have largely run their course.

Europe may still have some policy running room. Here in the U.S., though, I will be zeroing in on jobs, wages, and the consumer. Nowadays, that’s where the money is, not at the Fed.

Frankly, the transition may be rocky. The world has grown accustomed to relying on central bankers as Mom and Dad. Greece is far from the only teenager with a credit card. At the same time, the shift from politics to economic factors should end up being a positive development—and one that highlights the success of government policies since the financial crisis.

                      Subscribe to the Independent Market Observer            

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®