If You’ve Been Wondering What’s Driven The Recent Bull Market In Stocks…

…wonder no more. Let former Dallas Fed head Richard Fisher make it plain. He told CNBC this morning:

“What the Fed did, and I was part of that group, is we front-loaded a tremendous market rally… in order to accomplish a wealth effect.”

This is important for a couple of reasons. First, many investors and pundits have disputed the idea that quantitative easing was directly responsible for boosting prices of risk assets. They believe that fundamental drivers instead were responsible.

Fisher’s comments clearly deal some damage to this theory. (And it’s not just Fisher espousing this view. The Bank of England has actually quantified the effect of QE on asset prices.)

The second reason this is important is this: If QE has pushed risk asset prices beyond the point that is validated by the fundamentals then there will necessarily be a reckoning in which prices are forced to better reflect the fundamentals now that the stimulus from QE has been removed.

Fisher offered this very same conclusion:

“Values are very richly priced here so I could see significant downside. I could also see just a flat market for quite some time again digesting that enormous return the Fed engineered for almost six years.”

Finally, it should be noted that Fisher has been warning about the risks arising from excessive central bank accommodation for quite some time. In 2014, he suggested the Fed may be, “responsible for raising the ghost of irrational exuberance.”

This was during a series of speeches he gave citing signs of overheating mainly in the corporate bond market. It seems to me that the recent rout in the junk bond market is just the beginning of the sort of reckoning he warned about back then.

Considering just how important the debt markets have been to the equity bull market in terms of funding buybacks and acquisitions, it doesn’t take much to understand how Fisher sees this reckoning now expanding to the broader stock market.