“Market Meltdown” or “Market Meltup”

Edward Yardeni, president and chief investment strategist at Yardeni Research was quoted in a Wall Street Journal Article over the weekend stating that he sent a note to clients on Friday: “Stock prices are on the verge of either a market meltdown or a market meltup,” Mr. Yardeni said. “ I know that’s not very helpful, but it is what it is.” But Mr. Yardeni’s message is helpful once we know the forces driving this conflicting message.

The meltdown scenario is pretty obvious. It all hinges on what happens in the coming week(s) with the government shutdown and the debt ceiling. The stock market began its’ free fall on September 19th until it abruptly did an about face on October 10th driven by a mere whisper of a deal coming out of Washington. Of course that deal didn’t materialize so we should expect the market to reverse course again on Monday.

The meltup scenario is a result of President Obama’s selection of Dr. Janet Yellen on October 9th to replace Dr. Ben Bernanke as the new Chairperson of the Federal Reserve. Her confirmation will reinforce the Fed’s evolution from an institution run by market-wise bureaucrats focused on controlling inflation to an institution run by academics committed to a mission of steady growth and minimum unemployment at the expense of higher inflation.

Dr. Yellen will be the first Democrat to lead the Federal Reserve in nearly three decades. Regardless of your political persuasion, the market will likely perceive Dr. Yellen’s confirmation as adding even more fuel to an already overheated stock market. But as we’ve learned over the past year, don’t fight the Fed! The tapering of “QE Infinity” will no longer weigh on the markets as Dr. Yellen is more likely to endorse more stimulus spending rather than less.

Dr. Ben Bernanke is a free market advocate with monetarist ideas believing that market economies are inherently stable if the money supply does not greatly expand or contract.

Dr. Janet Yellen holds Keynesian economic views advocating a mixed economy – predominately private sector, but with a role for government intervention through investment in infrastructure during recessions.