Encore: Why the market goes up when the Fed “quantitatively eases” …

Yesterday Bernanke announced another (and apparently infinite) round of quantitative easing … that is, substantially increasing the amount of money in circulation

The stated logic: keep interest rates low so that businesses and prospective homeowners borrow.

The cynical interpretation: 56 days until election … Obama stands by Bernanke … Mitt says he’s fire him

The immediate impact: stock jumped over 200 points.


There’s a strong link between the supply of money and stock prices.

More money => lower interest rates +> higher comparative returns from stocks => higher stock prices.

That is, until inflation kicks in and borrows face higher rates …

* * * * *

Here’s an archived post that gives more detail:

Back about 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.


The article summarized an econometric study that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

OK, fast forward to today.

Now, when the Feds expand the money supply, it’s called “Quantitative Easing” … or QE, for short.

Recently, Jason Trennert of Strategas Research Partners published a revealing chart that visually relates stock prices (the S&P 500) to the recent periods of quantitative easing.


Looks like the supply of money and common stock prices are still related.

Partially explains why the Dow is over 13,000 despite a sluggish and uncertain economy.


>> Latest Posts

Tags: , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s