Imagine your doctor put you on a daily dose of oxycontin, phenobarbital and Quaaludes for six years straight. Then he suddenly cancelled your prescription.
Do you think your behavior might become a bit erratic?
This is what’s going on with the stock market. It’s trying to shake off six years of overmedication brought on by the Fed’s zero rates and liquidity injections.
Let me explain: Until recently, stocks had been on a tear that pushed valuations into the stratosphere. Volatility stayed low because Bernanke’s easy money and QE made investors more placid, serene and mellow. They ventured further out on the risk curve and took more chances because they were convinced that the Fed “had their back” and that there was nothing to worry about.