Don't blame China for the market sell-off

Recent volatility and downside slippage in the equity markets has been ascribed to China and the potential for slowing global economic growth. To be sure, these are factors worth watching but they are hardly newsworthy.

We have known for some time about the likely effects of China's transition from manufacturing and goods production to consumerism and a service-sector orientation — a transition that means the metrics analysts have depended upon to assess Chinese growth have to be recalibrated.

Moreover, anybody who has observed the internal Chinese equity markets in Shenzhen and Shanghai understands that market behavior there has little correlation with macroeconomic phenomena. As to the knock-on effects in the emerging nations that supply China with raw materials, the effect of China's transition on materials sold there has by now been well discounted.

While I would not completely pooh-pooh the effect of developments in China on the rest of the global economy, I believe another factor is of greater importance in pricing the U.S. stock market going forward: the effect of accommodative Federal Reserve policy.

I spent 10 years (through last March) as a participant in the deliberations of the Federal Open Market Committee, setting monetary policy for the U.S. The purpose of zero interest rates engineered by the FOMC, together with the massive asset purchases of Treasurys and agency securities known as quantitative easing, was to create a wealth effect for the real economy by jump-starting the bond and equity markets.

The impact we had expected for the economy and for the markets was achieved. By February of 2009, the Fed had purchased over $1 trillion in securities. With interest rates throughout the yield curve moving in the direction of eventually resting at the lowest levels in 239 years of history, the stock market reacted: It bottomed in the first week of March of 2009 and then rose dramatically through 2014. The addition of a third round of QE, which had the Fed buying $85 billion per month of securities to ultimately expand its balance sheet to over $4.5 trillion, juiced the markets.

I voted against QE3 but the majority of the committee embraced it. One could argue — as I did — that QE3 and its predecessor rounds front-loaded the equity market. Stated differently, I believe we engineered a version of the "Wimpy philosophy": We gave stock-market investors two hamburgers today in exchange for one or none tomorrow. We pulled forward the price-reaction function of markets.

If that is a correct assessment, then there may well be a payback period of lesser movement in stock prices to follow. 2015 might have been the beginning of that balancing out: Minus dividends, the S&P and every other index experienced minor negative returns last year. (If you take out four stocks — Google, Amazon, Facebook and Netflix — the Nasdaq Composite finished down 0.3 percent for the year.) It would not be unreasonable to expect subdued returns this year given that stocks are still richly priced by historic standards.

We will see what ensues. But one thing to bear in mind is that the Fed is focused on the real economy looking out to the intermediate term, not necessarily on sustaining the stock market today. In an effort to revive the economy, it floated all boats with its hyper-accommodative monetary policy. The real economy has been extensively repaired. And the easy money in investing has been made.

Now we will see who the truly smart investors are and who merely looked smart by having ridden the rising tide engineered by the Fed. As Warren Buffett has often said: "you only learn who has been swimming naked when the tide goes out."

My guess is that, going forward, the view will be quite revealing.

Commentary by Richard Fisher, the former president and CEO of the Federal Reserve Bank of Dallas from 2005 to 2015 . He is a director of PepsiCo and ATT; a senior advisor to Barclays; and a CNBC contributor. His views are his own and do not necessarily reflect those of the organizations he is affiliated with.

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