Does The Market Run on Fundamentals?
- Posted by TheArmoTrader
- on March 25th, 2013
- The FED is improving the economy via ZIRP, QE, etc. This in turn is lifting the market.
- The FED is forcing people out of risk-free/low-risk assets into risky ones. Thus forcing people into stocks.
- The FED, buy ‘printing money’ is putting all this new money out there, which ends up in the stock market.
- The FED (or its henchmen in the PPT) is literally buying the market.
Now, the first two are legit arguments. However, I personally believe the answer lies somewhere between the 1st and 2nd phrase.The FED is certainly doing its part in trying to get people out of risk-free assets and into risk assets. However I also believe the economy is healing. Now, one must remember that the stock market is not the economy. It does not reflect everything in the economy. I don’t want to get too fundamental but basically the market (Let’s take the $SPX) reflects the conditions of the 500 companies listed in the index. So just because unemployment is high, it doesn’t mean other parts of the economy are not healing/healthy.
For example, here’s an interesting chart that shows US Corporate Profits vs the S&P 500 ($SPX). You can see a basic relationship here. Corporate profits increase, the stock market increases. Simple as that.
Next you have a chart of Durable Goods (New Manufacturing orders) vs the S&P 500.
And lastly, probably my favorite relationship is the Initial Claims vs S&P 500 chart.
1) As you see above, you have three diverse parts of the economy. Profits, Trade, and employment all have recovered or are healing. We can argue what is driving this. Market Monetarists would probably argue its all thanks to the FED. Libertarians would probably argue its thanks to the resiliency of the innovative private sector economy. Personally, I think its somewhere in between. The FED has helped. The private sector is resilient. But that’s another conversation (the cause of the improving economy). The cause of the rising market is NOT just the Fed.
2) I am sure I can find other relationships that exist but correlate to a lesser degree. For example: Industrial Production, NonFarm Employment. But I’m not going to list every small correlation I find because my point is bigger here. The market is more than just “The Fed!”.
3) Yes, I understand correlation does not equal causation. But its going to be hard to argue that recovering profits, trade, and employment do not equal higher stock prices. I’m all ears if you could do that.
4) Now, just because a relationship exists, doesn’t mean its always going to be right. These relationships can get volatile, change, or totally lose correlation. So what might work today won’t work tomorrow.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry "TheArmoTrader" Khachoyan is currently an active trader, investor, market commentator, and Finance-Twitter participant. He started being involved with financial markets in September of 2008. He concentrates on using technical analysis and an understanding of macro to determine his trades and investments. He graduated UCLA with a degree in Political Science in 2013. The stock market to him is one of the greatest inventions by man.
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