Fed Behind 93% of S&P Rise Since ’08: Economist

The housing bubble emerged shortly thereafter and contributed to 94% of the market’s move through around 2007-2008. 

Analyzing the Analysis

Investors and other readers posted more than 960 comments about Barnier’s conclusions, prompting the economist to post a response on FedDashBoard.com.

“Regarding the recent ‘Fed era,’ then-Chairman [Ben] Bernanke laid out the history and expectations nicely in his 2012 Jackson Hole speech,” the economist said.

As for future analysis, methods of prediction should be adjusted going forward, he says, for the following reasons:

• Data have changed, such as in the credit distribution in households;
• The Dodd-Frank Act has completely reshaped open market paper; and
• The Federal Open Market Committee is “struggling with the clash between outdated theory and today’s economy being reshaped by technology and related forces (global capacity, sharing economy or online search for better products at better prices).”

Barnier admits that “there were other influences” beyond the Fed on the market since 2008. However, his analysis aims “only to show the power of a single factor.”

And, as all good statisticians know, correlation is not causation. “This is a big problem when commentators say ‘lockstep’ because of a loose visual association of two lines,” he added.

As for a commenter, “an apparent physicist who noted [that Barnier’s analysis] assumes that the relationship between the stock market and other factors is purely linear, but makes no attempt to justify that model,” the economist explains his methods as follows:

First, he “did not mean to give an impression of linear relationships at all stages of analysis, but rather that more explanatory power creates more stable, horizontal lines on a chart.

And, second, that the tools used for these conclusions are “not the same tools that failed to predict the housing bubble busting.” (See Treacherous Triangle.)

Barnier says the method he relies on “is just graphical econometrics, also used for some types of problems in operations research, quality management and such.”

The aim of the analysis is to help visual learners, and “it works for linear, curved functions and stochastic data. It’s especially satisfying for students as they can ‘see’ themselves solving the problem the closer the solution gets to a stable line with only true random variation,” he explained.

— Check out Warning: Don’t Party Over This Market Rally, BlackRock’s Koesterich Says on ThinkAdvisor.