Monday, 3 June 2013

S&P 500 Returns with and without Money Printing

The Economist recently published an article titled Don't Worry be Happy about stock markets where it refers to Hanz Lorenzen of Citigroup (time period investigated was not stated),
Mr Lorenzen calculates that the S&P 500 has risen by more than 70% cumulatively in periods when the Fed was pursuing QE and fallen by around 15% when it has paused. Investors may have taken heart, too, from monetary easing elsewhere: many central banks have cut rates in recent weeks, including the euro zone’s.
You better therefore continue to watch the developments in the U.S. monetary base and money supply. Especially if you are a stock market investor.

The article also explains that the U.S. stock market rally appears not to have been fueled by the global economy but rather perhaps by the Bank of Japan (and the Fed as stated above),
So what is fuelling the rally? It does not seem to be the strength of the global economy. Recent data have been mixed. Last month the IMF lowered its global-growth forecast for the year from 3.5% to 3.3%. If global growth prospects were improving, one would expect emerging-market stockmarkets to be performing well, too; in fact, they have been flat this year (see chart). And commodity prices usually strengthen when the economy improves, but The Economist’s all-items index has fallen by 3.2% so far this year, with industrial materials dropping by 7.1%.
Nor is the rally due to a surge in profits. First-quarter results from firms in the S&P 500 were better than expected, but they usually are (thanks to careful management of expectations) and they still showed only a 5.1% increase in profits compared with the same period of 2012. If financial companies are excluded, the gain was just 2.6%. In Europe first-quarter earnings were 3% lower than they were a year ago, or 7.3% if financial firms are left out, according to Morgan Stanley, an investment bank.
Perhaps the most popular explanation relates to the commitment of the Bank of Japan (BOJ) to eliminate deflation with the help of a big increase in the monetary base.
Takeaway: don't limit yourself to "Fed-watching", but stay up to date on the actions, and plans, of other major central banks around the world as well.

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