Why did the stock market hit record highs despite a sluggish economy?

Yesterday, the stock market soared when Bernanke announced the continuation of the Fed’s Quantitative Easing program … that is, the Fed plans to continue pumping $85 billion dollars per month into the economy.

stocks surge on Fed action

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So, why did the market reach record highs?

Easy.

Let’s start by taking a stroll down memory lane ….

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”.

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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.

Hmmm.

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.

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