Ah, the markets are surging higher today after yesterday's bloodbath decline. Well, this should not be a real surprise to traders. By now, we should all know that the stock market rarely declines on a Friday. You see, Friday is the end of the work week for most people. Therefore, if someone comes home from work and sees the Dow Jones Industrial Average(DJIA) lower by 100.00 points they are likely to save their money instead of spending it. Most retail stores, restaurants, and other entertaining venues will do the most business on the weekend. If the average Joe comes home and sees a stock market crash or sharp decline he will think differently about spending his hard earned money over the weekend.
If you look at a chart of the Dow Jones Industrial Average over the past two and a half years you will notice that there have been less than a dozen Friday's where the market has declined by more than 100.0 points. This is because the powers that be need the U.S. consumer to spend money. All of this weak dollar stuff that the Federal Reserve and other central banks have done, such as the zero percent Fed funds rate since December 2008, $1 trillion QE-1, and the current $600 billion QE-2 , will only work if the U.S. consumer spends money. Please remember that consumer spending accounts for roughly 70.0 percent of the gross domestic product(GDP) in the United States.
The Federal Reserve boss, Ben Bernanke, wrote exactly about this many years ago. Basically, he says if the stock markets are higher than the public will feel better. He is actually correct if you look at the Friday effect. The central bank controls the stock and commodities markets by the amount of cash reserves they create. The only negative for the Bernanke theory is that by creating cash he also creates inflation. When goods become too expensive due to inflation the economy will ultimately suffer. Just look at the price of gasoline, food, and most other commodities recently. However, the party for the stock market will usually last until that final point of inflation becomes too much pain for consumers. Since March 6, 2009, the inflation party has been in full force. Yesterday, the U.S. Dollar finally surged higher and look how quickly that inflation party came to an end. Today, the U.S. Dollar is trading flat and the party is back on. Today is also a Friday, the volume is extremely light, and the government job report was much better than expected.
Since the tech wreck, and the dot com bubble burst, in the year 2000, the solution for the stock markets by the central bankers has been to weaken the U.S. Dollar. That was tried by the former Federal Reserve boss, Alan Greenspan, in 2002 which lead to the greatest stock decline since the Great Depression in 2008. This time around the current Federal Reserve boss, Ben Bernanke, has done much more stimulus and money creation than Alan Greenspan ever did. This method that the central bank uses is really just playing yo-yo with the U.S. Dollar. Last year, the U.S. Dollar Index surged higher from November 2009 until June 2010 and that surge in the dollar caused the stock market to stage it's first 17.0 percent correction since the inflation rally began in March 2009. This is a direct correlation to the U.S. Dollar Index and that is still all that really matters. At this point in time the stock market cannot stand on its own two feet with a falling U.S. Dollar. This is unlike the 1990's when the stock market and the dollar rallied higher together. When the dollar and the markets can trade higher together that is real wealth. Right now, when the dollar trades lower and the stock market trades higher that is just a trade off. Wealth is not created when that happens, and hopefully the equity you have has increased more than the dollar has declined. There is really nothing gained here.
Oh well, let us enjoy the Friday rally and remember to spend some money this weekend. Please keep an eye on the U.S. Dollar, if that green piece of paper catches a bid today's rally may not last very long.