Is The Fed’s Balance Sheet Driving The Stock Market Higher?
- Posted by TheArmoTrader
- on August 5th, 2013
Is the Federal Reserve’s balance sheet driving the Stock Market higher? Does $FED bond-buying push the market up? I think there are various views on this but one view that I think is erroneous is the one that correlates the stock market’s move up with the fed’s balance sheet directly. Now, I’ve talked about the market and fundamentals in the past, so I won’t dwell into that debate. But I want to make one thing clear. There is no direct causation between the $FED’s balance sheet expansion and the stock market. The FED is not blowing up a bubble (themselves directly). Here’s why.
For starters, the correlation is weak. Where was this correlation between 2002-2008? There was steady, minimal growth in the balance sheet but expansion in the balance sheet did not correlate at all with the market. And this was during one of the biggest bubbles in American histories too! Then take a look at 2008-2009. The market was cratering, yet the FED’s balance sheet was growing exponentially. If balance sheet expansion meant the stock market is supposed to go up, why was the exact opposite happening?
Correlations come and go, but even after 2010, the correlation was never great. After the balance sheet stopped growing in 2011 (due to the end of QE2), the market did drop but by the time the balance sheet started expanding again (due to QE3), the market was up ~11% [Green Arrows]. The correlation does pick up a little after 2010 like I said but I don’t think much of it. Why? Because this same argument was made for Gold (google it), yet now that gold has crashed, nobody is making it anymore.
Now, has $FED policy caused the market to move higher (or higher than what it should have been ex-monetary easing)? Maybe. That argument is a legit one we can have because it revolves around if we think the $FED has the tools and influence to indirectly cause the market to move higher (IE – causing people to move out of bonds and into stocks in search for better yield). But those who argue that the Fed’s balance sheet is the one driving the market higher, simply do not understand how the system works.
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 Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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