Kudlow: QE3 Could Actually Drag Stocks Lower

On Monday investors were struggling to get a handle on the market with stocks closing lower after touching their highest level in nearly five years last week.

Even with the declines, both the Dow and the S&P 500 were still trading at levels not seen since December 2007.

Bulls drove the advance after the Federal Reserve unveiled new stimulus measures that they believe will ignite the next leg higher.

However, the stimulus package likely comes with inflation and concerns about inflation could be the proverbial fly in the ointment.

Consumers may not be able to handle higher prices - especially higher prices at the pump.

“There’s never been a time when gas prices above $4 have not slowed growth,” said Keith McCullough, Hedgeye Risk Management CEO on The Kudlow Report.

At last look, prices at the pump were $3.878 a gallon.

In other words, pros like McCullough are worried that the Fed’s new stimulus program may actually make the economy worse by unleashing inflation.

In turn, inflation makes trouble for the stock market.

“The case the bulls have been making is that growth is back, earnings are strong and stocks are cheap,” explained McCullough

"However, if inflation causes growth to slow it will put earnings under pressure.”

And in that scenario, “What’s cheap? – If you’re using the wrong revenue and earnings numbers – can you value this market?”

McCullough doesn't like it.

“All I think Bernanke has done is compress 3 years of equity returns into the 3 months ahead of the election.”

Tune in:

"The Kudlow Report" airs weeknights at 7 p.m. ET.