“We do not target the level of stock prices. That is not an appropriate thing for us to do.”
Fed Chair Janet Yellen
It’s the equivalent of social passing or grading on a curve. While the stock market is breaking new records, its recent performance is not a reflection of reality.
As Larry Fink, chairman and CEO of BlackRock, told CNBC’s “Squawk Box,” “I don’t think we have enough evidence to justify these levels in the equity market at this moment.” 
He said the recent rally has been driven by institutional investors covering shorts (i.e., hedging bets that stock prices would fall), and not by bullish individual investors. In fact, he noted that outflows in mutual funds show that individual investors are becoming squeamish about stock prices.
Institutional investors were short going into Brexit, but are recalibrating their portfolios, Fink said, given that the Brexit aftershock has not been as long-lasting as expected. While some may have been concerned about the economic impact of the United Kingdom voting to leave the European Union, ultimately its impact on markets was muted by the knowledge that Brexit would most likely keep the Fed from increasing interest rates anytime this year.
Janet Channels Hillary
The market distortion is not limited just to equities. Fink noted that huge inflows are continuing into fixed-income products. This “risk-off trade” culminated in a record low yield of just 1.36% on U.S. 10-year government bonds on July 5.
You may recall that in years past, before the Federal Reserve Board began its zero interest rate policy (ZIRP), the stock and bond markets moved in opposite directions, so that a portfolio that was diversified with both assets could hedge against risk. Today, investors are moving further into bonds, as they perceive bonds to be safer than overpriced stocks.
But bond prices as a whole decrease when interest rates increase. An experienced bond trader can still take advantage of bond duration and other factors to achieve positive returns even as interest rates are increasing, but the typical investor could suffer.
Ultimately, it’s been the Fed, not institutional investors, that’s been causing markets to go wild. The problem with boosting stock and bond prices by lowering interest rates is that rates sooner or later rates have to increase. When the Fed increases interest rates—or even talks about increasing interest rates—both stock and bond markets will likely be hammered.
Given the huge impact that Fed policy has on the markets, it’s astounding that Ms. Yellen would testify before Congress, as she did recently, that it would be “inappropriate” for the Fed to try to boost stock prices.
Congressman Edward Royce (R-Calif.) asked the chair whether the Fed’s boosting of stock prices might be a “third pillar” of monetary policy, along with keeping unemployment low and controlling inflation. Royce quoted former Fed Chair Ben Bernanke saying that the goal of the Fed’s quantitative easing program (QE) was “to increase asset prices like the stock market to create a wealth effect.”
“It would stand to reason then,” he added, “that in deciding to raise rates and reduce the Fed’s QE balance sheet, standing at a still record $4.5 trillion, one would have to be prepared to accept the opposite result, a declining stock market and a slight deflation of the asset bubble that QE created.”
He also noted that every time in the past three years when there has been a hint of raising rates and the stock market has declined accordingly, the Fed has cited stock market volatility as “one of the reasons to stay the course and hold rates at zero.”
Ms. Yellen’s denial about Fed market manipulation is about as believable as Hillary Clinton’s comments about her e-mail.
Stock Buybacks
Another reason for the market rally was stock buybacks.
Fink may have avoided mentioning stock buybacks, given that BlackRock, which is the world’s largest asset manager, has been buying about $275 million of its shares every quarter, even though Fink has previously warned about the downside of share repurchases.
Buybacks can boost earnings per share by reducing the number of issued shares, but some consider stock buybacks to be financial engineering. In the past, Fink has said that executives have relied too heavily on buybacks, instead of boosting stock values by making long-term investments.
S&P 500 companies bought back shares valued at $161.39 billion during the first three months of 2016, the second-biggest quarter ever for repurchases, and overall companies had authorized $357 billion in buybacks this year through the end of June.
So, essentially Fed policy has left corporate America with a record amount of cash, which is going into stock buybacks, which help the wealthiest Americans. If the cash were instead invested into corporate growth, it would boost the economy, creating jobs and boosting incomes.
Why are public companies investing in their stock instead of into future growth? Because high taxes, intensive regulation, and uncertainty about the future make investing in corporate growth less attractive. In effect, policies created to help diminish income inequality are instead adding to it.