Where Would the S&P 500 Be Without Fed Stimulus?

How many times since the financial crisis have you woken up to find that the futures were soaring higher due to a recent Federal Reserve announcement?

This has happened so many times that you can’t even keep count. So, where would markets be without monetary policy assistance? The answer to that question might astonish you.

The Basics

The financial crisis and today’s debt crisis began with the tech bubble. As you know, the tech bubble was created by irrational exuberance. This went to such an extent that the vast majority of tech companies were reporting consistent losses, yet their stock prices were flying so high that investors were complaining about 30% gains. As a side note, if you put yourself back in that time, not many people sounded the alarm. Everyone was making money, so nobody looked at the fundamentals—until they did. That’s similar to today’s situation. Unfortunately, today’s situation doesn’t relate to failing tech companies but entire nations.

To drive markets higher, Fed Chairman Alan Greenspan lowered interest rates. This continued to a point where it drove demand for housing. Investors feared stocks because of the tech bubble, but housing was “bulletproof” because “they weren’t making any more land.” This is similar to today’s argument for U.S. equities: “Where else are you going to put your money?” If perception and the Fed didn’t help drive markets, and equities were based solely on actual economic fundamentals, you’d see a market many floors lower than today’s sub-penthouse.

You know what happened next. Low interest rates led to loose lending practices, which then created the subprime mortgage meltdown. This, once again, took stocks down with it. But large-caps weren’t safe either this time.The solution? Lower interest rates.

Do you detect a pattern? It’s not just a coincidence that interest rates are at record lows, and stocks are near record highs. Even savvy investors and many traders know what’s eventually coming, but they’re basing their investments and trades on the Federal Reserve. Translation: They will remain long as long as long as they have the Fed’s support. The problem is that the Fed has created massive bubbles, with debt being the common theme. Total global debt currently stands at approximately $230 trillion, and total global Debt-to-GDP is approximately 300%. To put that in perspective, Debt-to-GDP of 60% is considered healthy. This might not end soon, but the longer it takes, the bigger the bust will be.

S&P 500 Without Fed Assistance

Brian Barnier—member/principal at ValueBridge Advisor—recently demonstrated that 93% of the move in the S&P 500 was caused by the Federal Reserve.

Let’s be very conservative and say that the S&P 500 has appreciated approximately 100% since the financial crisis from 1,000 to 2,018 (the S&P 500 actually bottomed at 666 in 2009). If 93% of that move was caused by the Federal Reserve, then you have to subtract 947 points from today’s value. This puts the S&P 500 at 1071. This also doesn’t include the fact that the Fed was responsible for 100% of the S&P 500’s rampant ascent in 2013.

Some investors and economists say that the market could manage on its own without Federal Reserve assistance. They might be correct, but there is no shortage of concerns, including:

  • Slowing and overleveraged China
  • China’s impact on smaller emerging markets
  • Deflation in Japan
  • Miniscule growth in the Eurozone
  • Aging consumer population in the United States
  • The student debt crisis
  • Commodity plunge
  • Reduced Median Household Income in the U.S.
  • Historically low Labor Force Participation Rate in the U.S.
  • A lack of top-line growth across most sectors
  • The potential impact of energy sector woes on high-yield bonds
  • Unknown risks for CoCos (contingent convertibles)
  • Extremely overbid real estate in U.S. cities
  • Unknown impact of negative interest rates implemented by five central banks
  • Astronomical global debt levels

The Bottom Line

Maybe the Federal Reserve can continue to hold up the market, but its shoulders must be getting heavy. Eventually, the weight of all the debt around the world will be too much for the Federal Reserve to carry. When this eventuality occurs, you might be lucky to see the S&P 500 at 1071.

Source: Invest


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Charles Clifton
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