What’s driven the S&P 500 Index for that past eight years or so? It’s the Federal Reserve, says economist Brian Barnier, a principal at ValueBridge Advisors and founder of FedDashBoard.com.
Speaking recently on Yahoo Finance, Barnier explained what happened when he looked at the impact of four factors on public equities: future (or forward) GDP, monetary policy, open market paper (commercial debt) and household debt.
“If we filter through … things … from the 1970s … for powerful factors,” he said in a televised interview Friday, by “taking out the snippets that worked,” in other words applying regression and other analytical tools, the economist is able to zoom in on which of the four factors most influenced the performance of the S&P 500.
“We had our tech bubble, our credit bubble and then our Fed bubble,” Barnier said.
The Fed used several trillion dollars to buy bonds. That quantitative easing policy, he says, means the Fed was essentially responsible for more than 93% of the market’s movement. Plus, the Fed caused the entire market’s growth in the first six months of 2013.
“That’s the beauty of the visual analysis,” he said. “All we have to do is find straight, stable lines and we know we’ve got something good.”
From November 2008 to October 2014, the S&P 500 roughly doubled in value, thanks to QE.
“This is amazingly stable; it is the strongest factors going back to the history [since] World War II,” Barnier stated.
With QE coming to an end in 2014, it’s time for investors to pinpoint the next driver, he adds.
“Quantitative easing has stopped, but now we’re into the interest rate world,” he said. “That means for any investor trying to figure out what to do, step one is starting with a macro strategy.”
As for earlier periods, future GDP estimates explained 90% of the market movement through the mid-‘70s, his analysis shows.
Next, household debt expanded and is tied to 95% of market movement through the early ‘90s.
The tech bubble came next, with Barnier’s research finding that commercial paper increases explain as much as 97% of that development.