Psycho-Analyzing the Market

In light of its negative reaction to an unimpressive March nonfarm payroll data, the market has sold off for the fourth consecutive trading session. Despite wary investors who now question the strength of the economic recovery, they all must take their eyes away from the microscope and look at the bigger picture. This top-down strategy approach requires an understanding of the greater implications of the market to the global financial system. It’s time to out-psychologize (yes, we are coining the phrase) the market, especially since Mr. Market is being manipulated by central bank intervention at a clip never before seen in modern financial history.

We are approaching yet another pivotal election in November and the most salient issues revolve around the economic recovery. And while Obama has made notable mistakes in his first administration, his savvy efforts to gain the most momentum going into the election cannot be questioned. His mindset is focusing on inspiring confidence through the most pervasive economic indicator and what has become the linchpin of the global economy – the market. His greatest tool lies in the Federal Reserve and given recent statements out of the FOMC, the Fed still has the ammunition necessary to provide liquidity that will ultimately take the market higher. It’s the biggest money that moves markets and that title now lies with the Fed and its third mandate to inspire economic recovery via the wealth effect. Dismal numbers today give every reason for the Fed to intervene. When they do so, we anticipate better-than-expected economic data in the months leading up to November including unemployment, earnings, and GDP to justify higher market multiples.

Given the Hobson’s choice that confronts the current administration’s ambition for reelection, we believe the markets will continue rallying to new heights with the Dow and S&P 500 breaking key psychological barriers of 14,000 and 1,500, another 8% from current levels (making it +40% from October 2010 lows), and thus sucking in sidelined investors who are anxious to participate in another bull market rally that could also possibly take it higher from there.

With the Fed in Obama’s side pocket, there can only be one card the President is playing if he wants to win the reelection game – and that’s going all in the market.

Well played, Mr. President. Well played.

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