Unmoored

I think it’s pretty hard to look at the behavior of the stock markets in the United States without wondering whether they’ve become unmoored from the real economy. There is some actual evidence to believe they have and that the stock markets have owed their growth over the last eight years to the Federal Reserve:

He isolated each factor in a separate chart, calling them “eras” for the stock market.

1. From after World War II until the mid-1970s, future GDP outlook explained 90% of the stock market’s move, according to statistical analysis by Barnier.
2. GDP growth lost its sway on the market in the early 1970s with the rise of credit cards and consumer debt. Household liabilities grew with plastic first, followed by home mortgages, until the real estate crash of the early 1990s. Barnier’s analysis shows debt explained 95% of the entire market’s move during this time.
3. The period between the mid- to late-1990s until 2000 was, of course, marked by the tech bubble. While stocks took much of the headline, that time also saw heightened activity in the commercial paper market. Startups and young companies sought cash beyond their stratospheric share values to fund their operations. Barnier’s regression analysis shows commercial paper increases could explain as much as 97% of the tech bubble.
4. Shortly after the tech bubble burst, a housing bubble began, once more in the form of mortgages and other debt. That drove 94% of the market’s move for the first several years of the current century.
5. As the financial crisis reached a fevered pitch in 2008, the Federal Reserve took to flooding the financial market with dollars by buying up bonds. Simultaneously, interest rates fell dramatically, as bond yields move in the opposite direction of bond prices. Barnier sees the Fed as responsible for over 93% of the market from the start of QE until today. During the first half of 2013, the Fed caused the entire market’s growth, he said.

Since the Fed stopped buying bonds in late 2014, the S&P 500 has been batted around in a 16% range and is more or less where it was when the QE came to a close. Investors need to anticipate the next driver, said Barnier.

Since goosing the value of financial assets has been the Fed’s objective since 2008, that’s it’s achieved some results is hardly surprising. That 93% of the growth in the stock markets over that period has been due to Fed activity is startling.

Here’s the greater question: is that a legitimate objective for the Federal Reserve? It certainly isn’t among their statutory mandates. And what should be done about it?