How Much More Upside Is There?

Tyler Durden's picture

For 5 years the correlation between the expansion of the Federal Reserve's balance sheet and the growth of the S&P 500 has risen dramatically. Since QE3 was unveiled, the correlation is converging on 1 which of course is just happy coincidence and nothing to do with the free and easy flow of liquidity that month after month of Fed largesse has created. The problem is we now know that the hurdles to a Fed un-Taper are very high and so we can extrapolate the end-point for the Fed's balance sheet and where stocks would trade at that point. The S&P 500's recent exuberance has priced in the total expansion of the Fed's balance sheet to the end of the taper, so how much more upside is there?

 

Coincidence...?

 

Perhaps not...

 

And close-up... we have priced in the rest of the Fed's balance sheet expansion to the end of the Taper... The S&P is actually around 20-25 points rich to the current levels of the Fed's balance sheet

 

Dont forget, tapering is not tightening... though it looks a lot like it will be...

As Jeff Gundlach recently opined...

What troubles me the most psychologically in the markets right now is this logic that as long as there is Quantitative Easing, stocks will go up.

 

And if the Federal Reserve drops Quantitative Easing, stocks will go up, too, because it means the economy is strong.

 

It makes me wonder.

But then again, Fed's Williams confirmed last night...

The Fed must blow bubbles because otherwise irrational investors get "carried away" and inevitably crash the markets...

 

Ultimately it seems clearer and clearer that, as Williams himself opines "financial stability is just as important as pursuing price stability and growth."

So prepare for QExxx