Dollars and Sense: As economy soars, Fed pulls back support

Market history. The stock markets made history this week when the Dow Jones Industrial Average crossed over the 16,000 mark for the first time ever Monday afternoon. The Standard & Poor's 500 index hit 1,800 for the first time ever. Of course, the real story is not just one day, but what got us here. The important numbers tell us that both indexes are on track for their best year in a decade. They have soared more than 140 percent since hitting a low in the Great Recession more than five years ago. Part of what got us here was the recovery from the disastrous dip in 2008 and 2009. Also fueling the markets was the Federal Reserve Bank’s $85 billion per month bond-buying scheme. Neither of these events, you’ll note, has anything to do with the underlying fundamental health of the economy itself.

Bubble territory? When the markets hit these milestone numbers, or set a new record, many people will predict we’re due for a correction or we’ve entered bubble territory. Based on what I said above, it’s pretty clear that the markets are defying gravity—and by that I mean the economy is not doing as well as the markets have done. Airplanes can defy gravity temporarily by burning fuel, but eventually they have to land. The markets have been fueled in part by the $85 billion a month the Federal Reserve has pumped into the markets. The question is, will real economic growth give the markets a mid-air refueling so they can continue to fly as the Fed shuts off its fuel supply?

Mid-air refueling. Retail stocks such as Home Depot showed strong results this week—an indication of good things going on in both the housing and retail sectors. Since retail sales account for the majority of economic activity, that’s a good sign that we may get that mid-air refueling that we’ll be needing as the Fed scales back its bond buying program in the months ahead.

The week ahead. Speaking of retail sales, even though we’ve been seeing Christmas ads for a month, we’re finally to the official beginning of the holiday buying season. This week will help tell the tale on how the economy will finish up the year. Also, even though it’s a holiday-shortened week, we will see quite a lot of economic news. A housing-starts report and a consumer confidence report are due on Tuesday, and the Labor Department is moving up its unemployment report from its normal Thursday release to Wednesday. Also on Wednesday: durable goods and leading economic indicators.