Yesterday’s action in the stock market could be a prelude of how investors will react in the future once the Fed decides to stop supplying our monetary system its sugar. The comment from the Fed was that they may slow or even stop purchasing our debt, the end to quantitative easing (the sugar).
We are in a slow growth economy and normal valuation ratios would be compressed during these times but with the Fed putting the pedal to metal we have experienced a higher than normal valuation. The expectation should be: if the Fed stops, so will the markets. This will put the Fed into a conundrum as they need to find painless solution to the excessive monetary sugar easing.
Hopefully, Bernanke will find a way to get out of this predicament without hurting the economy. This will not be easy and fluctuations in the markets are sure to ensue.