In early 2012, I put up this chart:
Since the crisis turned “ugly” in the fall of 2008, we notice a positive correlation between the stock market and inflation expectations. This “theme” has been well covered by David Glasner. In “normal” times the two series go “their own way”, but these are not “normal” times.
As Michael Sivy argues, it´s not hard for investors to slip back to very worried pretty quickly and, as the chart shows, that has happened when inflation expectations “retreat”, which tends to happen when monetary policy is seen as failing to support economic improvement. And since the FOMC has alternated between “on” and “off”, so has the stock market and inflation expectations.
A few months later, QE3 arrived and suddenly the high positive correlation disappeared. The stock market kept climbing even after Bernanke´s May 2013 “taper talk” and the subsequent phasing out of QE3.
More recently, after the June FOMC meeting, which was heavy on “policy normalization” discussion, inflation expectations dived, and, for the most part, so has the stock market.
Despite thinking otherwise, it appears the Fed has really “tightened the screws”. The downgrading of world growth is a consequence. So we should forget about “policy normalization”, with the horizon for the first rate rise being extended to “infinity”!
I hope the Fed has another “rabbit to take out of the hat”!