This chart in Westpac’s Northern Exposure chart summary implies that US stocks rely on Fed balance sheet expansion (QE) for support.
The curve shows an almost perfect fit. There are just two things wrong with it. First, the scales on the left and right sides of the chart are not proportionate: the scale on the left compares a 9 times increase to a 3 times increase on the right. Second, while the Fed has expanded its balance sheet to more than $4 Trillion, a large percentage of that money has washed straight back to the Fed — deposited by banks as excess reserves.
The impact on the working monetary base (monetary base adjusted for excess reserves) is far smaller: a rise of 66% (or $544 billion) over the past 7 years.
A chart since 1985 shows nominal GDP (GDP before adjustment for inflation) normally expanded between 5% and 7.5% a year outside of recessions. But NGDP has not recovered above 5% after 2008. This may be partly attributable to lower inflation, but the Fed would clearly want to see NGDP above 5% — roughly 3% real growth and 2% inflation.
We can also see that growth of below 5% in the working monetary base is often precursor to a recession, 1995/1996 being one exception. The second is when the Fed took their foot off the gas pedal too early, after QE1 in 2010, but were able to resume in time to head off a major contraction. They have been far more circumspect the second time and are likely to maintain monetary base growth North of 5%. Too sharp a slow-down would be cause for concern.
When we calculate the ratio of total US stock market capitalisation to the working monetary base [blue line] it is apparent that market response to the increase in monetary base is far more cautious than it was in 1998/1999.
With Forward Price to Earnings Ratios for the S&P 500 and Nasdaq close to their long-term average (Westpac Northern Exposure, Page 118), I consider the likelihood of the QE taper precipitating a major market collapse to be remote.
Your assertion is based on fundamental data that might sustain your position but the supposed psychological reaction that the question itself raises is not ameliorated. When selling ensues, for any reason, substantiated or not, we need to think about damage control. Throwing data and charts at a fire-sale panic won’t douse the conflagration.
I thought we had the “taper tantrum” in October. Where do you see signs of panic in the market?
You state : “Where do you see signs of panic in the market?”
Perhaps in gold, iron-ore, silver and oil
Can it be that adequate growth probabilities are being questioned in the formers’ price actions? Can it be that the ending of money printing is being reflected accordingly here, with delayed effects yet to be reflected in industrial-oriented share prices ?
Gold and silver are currently consolidating in a pennant formation, so no signs of panic there.
Iron ore? Producers around the globe have been ramping up supply even as growth slows in China. Hardly panic.
Oil? Producers (Saudis) again are ramping up supply.
Impact on US industry from falling gold, silver and iron ore prices is likely to be marginal.
Oil on the other hand is likely to have a profound impact. SocGen estimate that a sustained $20/barrel fall in the oil price would boost US GDP by almost 2% over 3 years.
US forward Price to Earnings ratios on page 118 uses a 6 month average.
Try it with a 10 year average and see what you get.
I get P/E = 10.2 av – Current P/E = 19 but I might be wrong
Robert Shiller’s CAPE adjusts 10-year historic earnings for inflation before calculating a PE based on the current price. Are you doing something similar or are you using forward earnings estimates?
http://www.multpl.com/shiller-pe/
not only one but may be all market will go down this is the SCANDAL market they are eatting money from the retail investor who put money in market this not a fandamental market .This is very big scandal.
Stocks will fall if earnings fall. Of the 445 S&P 500 stocks with full operating comparative data for Q3,’14:
332 (74.6%) beat, 73 (16.4%) missed, and 40 (9.0%) met their estimates.
I mentioned ‘ the former’s PRICE actions’ . No doubt, the falls in the mentioned metals and oil recently have been of panic proportions in terms of price change per unit of time. Your associated responses appears absent in relation to prices, that I specifically mentioned.
A point is that the money printing ending is finding expression in these recent panic price adjustments ; why then not also later in US industrial share prices – not BECAUSE of falling metal/oil prices ( as you present ), but simply because asset prices may adjust downwards to reduced money supply availability, all other things remaining equal.
Commodity prices, unlike stocks, are influenced as much by supply as demand. The current price falls in iron ore and crude oil do not reflect panicked sellers. Major producers are ramping up supply as demand softens.
Who said the money supply will reduce? MB growth shows no sign of easing. Fed may halt asset purchases, but can easily encourage withdrawal of excess reserves on deposit by varying the 0.25% p.a. interest rate.
I don’t mind having an optional music video at the end of the serious comments – suchas Kenny Rogers – The King of Oak Street!
9 vs 3 is not a problem. in fact on a log scale it is just a scalar. the important point is the the agreement in shape of the two signals.
On a log scale the two lines will not match up. One expands 900% and the other 300%.
yes the map is linear in log which I would expect as there is an efficiency (scale) factor in the comparison. you can not expect it to be 1:1 given the differences in what is being measured. but it is linear in log indicating it is an interesting comparison. I would just give it more weight than you were and I am surprised the comparison is really as good as it is.
Not quite linear, there are a few flat spots. But linear in log would simply tell us that both have increased over time. A similar rate of increase would suggest there may be causality. But most graphics software allows one to manipulate the left and right scales to suggest a closer fit than there actually is.