Today the main factor influencing financial markets seems to be the anticipation of central bank actions. Historical market patterns have been radically altered over recent years. Since 2009 the Fed has reacted to every economic slowdown by introducing fresh easing measures, so that a paradoxical situation can be observed by now: disappointing macroeconomic data lead to price increases in stocks, as a continuation, respectively expansion of the QE program is priced in. Better than expected macroeconomic data on the other hand lead most of the time to price declines, as a reduction of future QE is anticipated.
Prior to the beginning of QE1, the historic correlation between the balance sheet of the Federal Reserve and the S&P 500 Index was 20%. Since 2009, this correlation has increased to 86%. The expansion of the money supply thus has had a bigger effect on the stock market than the trend of corporate profits. This relationship has been acknowledged by the Federal Reserve who argued in a study that, absent intervention by the central bank, the S&P 500 would be 50% lower.
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