The Long Term Investor

Good for you with the ICING oldmanram.

Every day is PROGRESS. The icing is the best thing you can do. Much of the pain that you get will be caused or contributed to by swelling. Icing for a few minutes multiple times a day when you notice swelling or pain is the best way to quickly move forward.

You sound like you are doing really well.....but the first couple of weeks with having to use the walker and lack of sleep is kind of a long slog. By the time you get to quit using the walker....you will be doing much better. At about a month out....you will be doing much of your normal life.

 

I like this little article.

March Inflation Through Markets’ Eyes
People hate inflation, but stocks often don’t.

https://www.fisherinvestments.com/en-us/marketminder/march-inflation-through-markets-eyes

(BOLD is my opinion OR what I consider important content)

"Editors’ Note: MarketMinder is nonpartisan, favoring no politician nor any political party. We assess developments and policy prescriptions solely for their potential market or economic impact (or lack thereof).

US inflation hit another 40-plus year high in March, this time with the Consumer Price Index (CPI) rate clocking in at 8.5% y/y. In a rather novel twist, most of the coverage parsed the underlying details in search of signs prices are peaking—and hit on encouraging nuggets like the deceleration in month-over-month core CPI, which excludes food and energy. While we think the nascent sentiment shift is noteworthy, the overall exercise seems largely beside the point. For stocks, the question remains: Is elevated inflation a big enough negative to knock the economy into recession? We don’t think so.

Not that fast inflation is good—it isn’t. For households keeping to strict budgets, it is cold comfort that prices outside food and energy rose just 0.3% m/m compared to headline CPI’s 1.2% jump.[ii] Inflation has become increasingly political, too, turbocharging the emotional response (and leading to some rather unusual “solutions,” which we will discuss momentarily). There are hardships and difficulties all around, and we don’t dismiss that. But stocks don’t move on whether any development is good or bad in a vacuum. Rather: Is the totality of the economic—and corporate earnings—picture likely to develop better or worse than expected over the next 3 – 30 months? Whether inflation is a big enough negative to offset all the positive forces is what really counts, in our view.

To assess this, we think it is most helpful to come at it from two angles: households’ point of view and businesses’. Spiking food and energy prices are widely seen as a headwind for the former, as they constrain family budgets. Yet spending on food and energy is still spending—it counts positively in GDP. Higher prices may limit spending on discretionary goods and services, but as we wrote a few weeks back, the effect historically hasn’t been as big as you might think. For one, food and energy were just 7.1% and 2.3% of total consumer spending, respectively, in 2019 (before lockdowns crashed oil prices).[iii] The extent to which households will have to make adjustments will depend on whether and how much their disposable incomes rise alongside the prices of their daily essentials. So far, wages and salaries are keeping a decently close pace, which should help limit the impact. The Atlanta Fed’s wage tracker, which charts individuals’ compensation, showed median wage growth at 6.0% y/y over the past three months.[iv]

We offer that stat as an economic offset because—and we say this without political bias—the White House’s latest reported plan to help tame gas prices probably won’t do much. In the time-honored tradition of “doing something” about something frustrating voters in a midterm election year, the Environmental Protection Agency has agreed to allow sales of gasoline with a higher ethanol count during the summer months. Typically, the summer blend has lower ethanol since the alcohol-based fuel generates more emissions than typical refined petroleum—an effort to keep the smog at bay during America’s traditional Road Trip season. But the White House has decided allowing more ethanol (and emissions) is an acceptable tradeoff if it can ease folks’ pain at the pump.

In our view, there is a tiny little problem with this: Ethanol derives from corn, and corn prices also spiked as Vladimir Putin invaded Ukraine. As we wrote last week, Ukraine is a top global exporter of wheat and cooking oil. With the invasion wiping out most of its shipments, demand for alternate grains and oils is spiking, sending corn prices through the roof. And unlike oil prices, corn hasn’t un-spiked since the invasion—it is trading at a high plateau. While Russian crude oil has still found its way to the market, easing the immediate supply concerns, there is no such luck for Ukrainian wheat and sunflower oil, which could extend supply constraints through this year’s crop season at least. So while Brent crude oil prices are now just 18.9% higher than they were six months ago, corn is up 46.2%.[v] Therefore, we fail to see how adding more ethanol will be a material benefit.

On the business side, we think the divide between headline and core CPI is more relevant. The latter rose a milder 6.5% y/y, with much of the rise coming from goods.[vi] Core services (meaning, services excluding energy services) rose 4.7% y/y.[vii] That means most businesses aren’t having to raise prices through the roof, which limits the risk of alienating their customers. It may also mean that many of these businesses are able to absorb their own rising costs without having to pass them on fully to customers—one of the benefits of having big profit margins, which companies up and down the S&P 500 have these days. Those with the ability to limit their price increases should gain market share, which can be a big long-term earnings boost if new customers stick around. That is a possibility we haven’t seen discussed much, making it an area where reality looks ripe to exceed dismal expectations.

Businesses’ ability to continue generating earnings in inflationary environments is why stocks often do better than other asset classes at keeping pace with (and even exceeding) consumer prices. While consumer prices rose 8.5% in the 12 months through March, the MSCI World Index returned 10.1% over the same period—that includes this year’s early correction (sharp, sentiment-fueled decline of -10% to -20%).[viii] The S&P 500, perhaps more relevant when discussing US-specific inflation measures, rose 15.6%.[ix] Hence, while inflation accelerated, stocks proved a pretty good inflation hedge. Of course, we are in a correction now, but in time, we suspect rebounding stocks will cushion investors against rising prices about as well or better than any other similarly liquid asset class out there.

America’s economy seems to be growing on an inflation-adjusted basis over the last year even though prices rose 8.5%. GDP isn’t synonymous with the economy, but as a rough gauge of output, real GDP rose 6.7%, 3.3% and 6.9% annualized, sequentially, in 2021’s final three calendar quarters. Q1 2022 data aren’t out yet, but monthly numbers held up pretty well. We already have a lot of evidence the economy can withstand fast price rises. In our view, the benefits from global reopening—which is well underway pretty much everywhere outside China—should help offset price-related headwinds, too.


Again, we know inflation is painful. We hate it too. But tuning down these emotions is key to navigating markets over time. Humans hate inflation, but stocks don’t."

MY COMMENT

YES.....to the above. Business......especially the BIG CAP side of business......will do just fine during this time of inflation.

For the short term......the emotional, frantic response to the daily news DOES drive stock prices......but over the longer term RATIONAL REASON comes into play. In the end we will see that....especially the BIG CAP SIDE OF BUSINESS.....did just fine regardless of any inflation.

Stock investors need to be careful to NOT equate the pain that consumers will feel from inflation......with how business will do in this environment.

 

The markets seem to be holding on to their gains.....although i would not bet on how the close will be. I am not saying it will be a bad close.....just that it is impossible to know. As to the markets today:

Stock market news live updates: Stocks inch up as traders eye earnings

https://finance.yahoo.com/news/stock-market-news-live-updates-april-13-2022-221446032.html

(BOLD is my opinion OR what I consider important content)

"U.S. stocks inched up Wednesday morning as investors monitored a series of closely watched earnings reports and further digested a hot print on inflation in the U.S.

S&P 500, Dow and Nasdaq were in the green as of 10 a.m. ET Wednesday as they try to end a three-day losing streak.

Investors on Wednesday received a number of quarterly reports from some major U.S. companies and stock index components. These included JPMorgan Chase (JPM) — the largest U.S. bank by assets — along with Delta Air Lines (DAL) and Bed, Bath & Beyond (BBBY).

JPMorgan Chase CEO Jamie Dimon offered a cautiously upbeat view of the U.S. economy in the bank's earnings release on Wednesday. Dimon noted that he remained "optimistic on the economy, at least for the short term," but still sees "significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine." And the bank also built up its credit reserves by a net $902 million, "largely due to higher probabilities of downside risk," Dimon said.

Meanwhile, Delta Air Lines, one of the major airlines at the center of the reopening trade, suggested business would pick up further in the current quarter even as first-quarter results showed another loss, as the airline grappled with the omicron variant wave earlier this year. The carrier returned to profitability in the month of March, Delta noted, and noted that revenue is expected to reach between 92% and 97% of pre-pandemic levels during the current quarter ended in June.

This early set of earnings reports helped set the tone for what is expected to ultimately be a much milder quarter for earnings growth than in recent periods. As companies grapple with rising labor, raw material and transportation costs and lap last year's initial reopening-fueled jump in activity, many on Wall Street are looking for narrower margins than in recent quarters, even as sales hold up strongly amid elevated consumer demand and rising prices. Across the S&P 500, companies in aggregate are expected to report year-over-year earnings growth of just 4.5%, which if realized, would mark the slowest rate since the fourth quarter of 2020, according to FactSet.

"This earnings season becomes one of the most important earnings seasons because it's going to give you a lot of insight into which companies ... have that durable demand, which companies have that pricing power," Kristen Bitterly, Citi head of global wealth investments, told Yahoo Finance Live on Tuesday.

"Even in decades like the 1970s, when we had extreme inflation, large-cap quality U.S. equity shares were able to double their share price over that period," she added. "So that's the pocket of the market where we're confidently either staying invested or getting invested."

And indeed, inflation has remained a primary concern for investors, threatening to weigh further on both consumers' wallets and corporate profits. The Bureau of Labor Statistics' March Consumer Price Index (CPI) showed inflation rose at the fastest rate since late 1981 last month, jumping by a slightly faster-than-expected 8.5% over last year.

However, some economists suggested the report was not all bad news, and showed some tentative signs of a peak in the rate of price increases.

"The CPI report I think actually has a little bit more good news in it than it appears right on the surface ... there're a number of things in here that suggests that we're starting to see inflation peak, and it will roll over in the next few months," Tom Simmons, Jefferies fixed income money market economist, told Yahoo Finance Live on Tuesday. "[It's] important to keep in mind that CPI, for March, the reference period here was right after the Russian invasion of Ukraine. So really, it's capturing the most acute period of gasoline price increases. And we've seen them already starting to soften in the market a little bit in the few weeks since."

"The other thing is that services ex-energy — and if you strip out the airline component — that was actually a little bit softer as well than the last few months," he added. "Housing actually came in a little bit softer in the last few months as well, and goods ex-energy also are coming in a little bit softer as well. So you know, the consumer has been pretty well able to weather the storm here with inflation."

8:50 a.m. ET: Producer prices hit new high

U.S. producer prices for final demand rose 1.4% in March after rising 0.9% in February, the Labor Department said on Wednesday. For the full year, PPI jumped 11.2% — the biggest gaun since the 12-month data was calculated in November 2010. The results superseded estimates of 10.6%, according to Bloomberg consensus.

The latest print suggests inflation will remain elevated as Russia's war on the Ukraine rages on and pushes prices of oil and other commodities higher.

7:03 a.m. ET: JPMorgan posts mixed Q1 results as investment banking revenue slides over last year

JPMorgan Chase posted a mixed first-quarter results, with overall adjusted revenue topping Wall Street's estimates while some major businesses within the bank showed some softening.

Adjusted revenue of $31.6 billion dropped 4.6% over last year but exceeded consensus estimates for $31.4 billion, according to Bloomberg data. Both fixed income and equity sales and trading revenue topped expectations while declining compared to last year, with these coming out to about $5.7 billion and $3.1 billion, respectively. Investment banking revenue, however, sank by a more marked 28% and missed estimates, totaling $2.06 billion as equity and debt underwriting activity decreased at the start of this year compared to last.

CEO Jamie Dimon also noted that the banks core lending business remained solid during the quarter.

"Lending strength continued with average firmwide loans up 5% while credit losses are still at historically low levels," Dimon said in the earnings release.

6:50 a.m. ET: Delta shares rise after airline posts narrower-than-expected Q1 loss, returns to profitability in March

Delta Air Lines shares moved higher in the pre-market session after the airline posted estimates-topping first-quarter results, which included a smaller-than-expected loss.

Adjusted losses came out to $1.23 per share for the March quarter, or narrower than the $1.26 per share loss consensus analysts expected, according to Bloomberg data. Adjusted revenue was $8.2 billion, and was 79% recovered compared to levels from the comparable quarter in 2019 before the pandemic. Capacity was 83% restored relative to the pre-pandemic period, Delta added.

For the current quarter ending in June, Delta said it expects capacity to further rebound to 84% of June quarter 2019 levels, with total revenue between 93% and 97% of levels from that period in 2019.

"With a strong rebound in demand as omicron faded, we returned to profitability in the month of March, producing a solid adjusted operating margin of almost 10%," Delta CEO Ed Bastian said in the company's earnings release Wednesday morning. "As our brand preference and demand momentum grow, we are successfully recapturing higher fuel prices, driving our outlook for a 12 to 14% adjusted operating margin and strong free cash flow in the June quarter.""

MY COMMENT

EARNINGS are here.......just in time to give investors some hope. I make no predictions.....but.....I believe that earnings will be stronger than anticipated.

HERE is the key statement in the above:

"Even in decades like the 1970s, when we had extreme inflation, large-cap quality U.S. equity shares were able to double their share price over that period," she added. "So that's the pocket of the market where we're confidently either staying invested or getting invested.""

There is a reason that I focus on the BIG CAP side of the markets. This is one of many reasons. These companies have the business and earnings POWER to weather and even thrive in all sorts of economic conditions. This quote above ties in with my post before this one.

We will see from the earnings that are going to be reported over the coming weeks which companies have the management and business strength to thrive. It is likely that many of the companies that do well in spite of the short term conditions WILL be the usual BIG CAP names.

The quote above is EXACTLY the reason that I call.....BULL SH*T.....on the constant crap you see in the media about how the raise in the Ten Year Treasury rates and the actions of the FED......are going to impact the HUGE BIG CAP companies like Amazon, Google, Microsoft, NVIDIA, APPLE, etc, etc, etc. I see this SPOUTED in the media nearly every day.......it it total BS.

 

Sorry house hunters......here is a relevant article. I will leave it to anyone that is interested to click on it.

U.S. mortgage interest rates top 5%, buyers look to lock in rates

https://finance.yahoo.com/news/u-mortgage-interest-rates-top-110942422.html

"The average contract rate on a 30-year fixed-rate mortgage increased to 5.13% in the week ended April 8 from 4.90% a week earlier."

 

Well said TireSmoke. You have very good balance with your 401K in the SP500 and your more risky and volatile individual stocks in your taxable account.

The above is a HALLMARK of a good investor and business person.

 

Looks like EVERYONE made money today. I was all green with all stocks. Plus a good beat on the SP500 by 1.02%. Nice to see a good UP day for once.

 

This little article has some good...."stuff" (data).......for those that might be house hunters or just interested in real estate.

Housing 2022: Here's the best way to win a bidding war — if you can afford it

https://finance.yahoo.com/news/housing-win-a-bidding-war-201535123.html

(BOLD is my opinion OR what I consider important content)

"Homebuyers are facing nothing but ugly in the housing market: Scant inventory, soaring prices, intense competition, and rising mortgage rates — the last factor sending buyers racing to get a contract in place before their rate lock runs out.

To do that, making an offer stand out in a bidding war is key.

And the best way to win against other bids is forgoing a down payment and forking over all cash, according to a recent Redfin’s analysis.

“Prospective homebuyers who offered all cash were more than four times as likely to win a bidding war as those who didn’t in 2021,” Dana Anderson, a data journalist at Redfin, wrote in the analysis, “making it by far the most effective strategy to win a home when there are multiple offers.”

Redfin found that 55% of homes priced between $200,000-$800,000 faced a bidding war in 2021, with the probability of a bidding war increasing as the listing price climbed. For instance, homes in the $800,000 to $1 million range experienced bidding wars 64.6% of the time.

Aside from offering all cash, which improved the likelihood of success in winning against multiple offers by 334%, there are other less successful strategies a buyer can use if their pockets aren’t lined with money.

For instance, waiving the financing contingency improved the likelihood of winning a bidding war by 31%, according to the analysis, while waiving the pre-inspection increased the success chances by 25%.

“A financing contingency allows a buyer to cancel a deal if their loan doesn’t come through by a certain date, and a pre-inspection means a buyer completes an inspection of the home before making an offer,” according to Redfin.

The pre-inspection isn’t the same as the inspection contingency that happens after an offer is accepted and allows the buyer to cancel or negotiate if repair issues are found.

Redfin found that offering to waive the inspection contingency of adding an escalation clause to increase an offer to match a competing bid didn’t “increase potential homebuyers’ chances of winning a bidding war…because those strategies are so common in a competitive market and often don’t benefit one buyer relative to the competition.”


Redfin study shows cash offers win bidding wars. (Credit: Redfin)
Redfin agents said offering more than the asking price or waiving the appraisal — meaning the buyer goes forward with the deal even if the appraisal comes in lower than the offer — are other ways potential buyers can distinguish themselves from the crowd. But the analysis did not evaluate the effectiveness of these strategies.

Still, buyers shouldn’t offer with abandon. Homebuyers’ remorse was up in 2021 with many homeowners citing paying too much for the home and maintenance costs as regrets. Waiving an inspection that can reveal problems with the home may not be the best alternative for most buyers.

“I tell my buyers not to compromise everything by giving up all the contingencies and safeguards that are in place to protect them,” real estate agent Jennifer Ciacci told Redfin. “They need to be aggressive in order to win, but shouldn’t put their family’s financial health in jeopardy by doing things like blindly waiving inspections altogether.”"

MY COMMENT

At least this little article gives you some of the......odds......of using various strategies. Most of these strategies are known to ALL agents and their buyers.

 

Thank you EARNINGS......for the distraction from the other issues that are plaguing the markets lately.

Stock market news live updates: Stocks rise to end three-day losing streak as traders eye earnings

https://finance.yahoo.com/news/stock-market-news-live-updates-april-13-2022-221446032.html

(BOLD is my opinion OR what I consider important content)

"U.S. stocks gained on Wednesday as investors monitored a series of closely watched earnings reports and further digested a hot print on inflation in the U.S.

The S&P 500 jumped by more than 1%, ending a three-day losing streak. The Nasdaq Composite outperformed and rose 2% as technology shares jumped and Treasury yields pulled back across the curve.

Investors received a number of quarterly reports from some major U.S. companies and stock index components early Wednesday morning. These included JPMorgan Chase (JPM) — the largest U.S. bank by assets — along with Delta Air Lines (DAL) and Bed, Bath & Beyond (BBBY).


JPMorgan Chase CEO Jamie Dimon offered a cautiously upbeat view of the U.S. economy in the bank's earnings release on Wednesday. Dimon noted that he remained "optimistic on the economy, at least for the short term," but still sees "significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine." And the bank also built up its credit reserves by a net $902 million, "largely due to higher probabilities of downside risk," Dimon said.........."

MY COMMENT

Thank goodness for earnings. We really need a distraction from all the .....DRAMA.....type news.

 

This little article......probably.....contains a bit more of WHY the markets did what they did today.

Treasury Traders Pare Bets on Fed Hikes as Two-Year Yield Falls

https://finance.yahoo.com/news/treasury-traders-pare-bets-fed-150544355.html

(BOLD is my opinion OR what I consider important content)

"(Bloomberg) -- Traders are dialing back aggressive bets on how far the Federal Reserve will go in its inflation-fighting campaign, spurring big moves across the front-end of the U.S. bond market.

Expectations that consumer price pressures may have peaked after data releases this week triggered a near 20 basis-point decline in two-year Treasury yields relative to Monday levels, with large block trades seen in securities acutely sensitive to shifts in interest-rate policy.

That, coupled with selling pressure on longer-dated Treasuries amid auctions, steepened the yield curve by widening the gap between long and short-term rates. It’s a pronounced shift from the recession-flashing inversion seen earlier in the month, when 30-year yields slipped below those on 2-year notes.

“The regime shift narrative to higher rates has been exhausted and the terminal rate might be lower than previously thought,” said Ian Lyngen, head of interest rate strategy at BMO Capital Markets.

The consumer price index for March showed a modest moderation in core prices that may suggest a peak in broader inflation pressure. In the wake of the data, the swaps market has cut nearly a full quarter-point rate hike from its pricing from now until December meeting. Derivatives traders are pricing in around 2 percentage points of additional hikes into the December meeting, down from 2.2 percentage points at Monday’s close.

The shift in sentiment has also been spurred by technical factors, with money managers taking profits on curve-flattening wagers, one of the hottest trades on Wall Street this year.

In Wednesday late-afternoon trading, Treasury yields had edged up from their session lows. The two-year note was down almost 5 basis points to 2.36%, the five-year note dipped 3 basis points to 2.66%, while the 10-year was nearly 2 basis points lower at 2.705%.

The 30-year yield, which rose slightly after soft demand for the sale of $20 billion the bonds, was unchanged at 2.81%.

With both 10-, and 30-year Treasuries lagging the decline in shorter-dated Treasury benchmarks, the yield curve has dramatically steepened. The gap between two- and 10-year rates stands at 0.34 percentage points, above the 50-day moving average for the first time since October 2021. The curve between two- and 30-year yields was 6 basis points steeper at 0.44 percentage points, after briefly falling below zero at the start of April.

The rally in policy-sensitive yields reflects easing bets on how far the U.S. central bank will tighten policy in the current business cycle, known as the terminal rate.

“We’ve been taking some of the expectations for a terminal rate near 3.25% to inside 3% on the back of the narrative of peak inflation,” said Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities. “The move has been big due to positioning and expectations around the terminal rate are extremely volatile.”"

MY COMMENT

In other words......the markets lately are being punished by BOND SPECULATORS. Now that they got a little ahead of themselves and had to back off......we are seeing the real stock markets come back into view.

A perfect example of how short term......"stuff".....with absolutely ZERO relevance to stocks.....often is the short term day to day driver of the markets. this is a great example of why long term investors simply need to IGNORE the short term day to day DRAMA.

 

That is an interesting story mizugori.

I would like to see it happen. The primary reason is I would like to see what he is able to do with the company. It would be an interesting experiment in how leadership, management, culture, etc, etc, impact a company and company success.

 

A MIXED open today for the markets. I would guess that we are seeing profit taking and trading on the gains yesterday as the buyers and sellers battle it out in the short term markets.

About the best I can say today.....so far is.......the markets are open.

 

I like this little article.

No, the Fed’s Balance Sheet Doesn’t Explain Stocks’ Moves
Just because two lines look alike on a chart doesn’t mean they are related.

https://www.fisherinvestments.com/e...eds-balance-sheet-doesnt-explain-stocks-moves

(BOLD is my opinion OR what I consider important content)

"Every now and then, a chart goes viral and freaks people out. In early 2014, it was a graph that used manipulated y-axes to make the Dow Jones Industrial Average’s path since July 2012 look identical to the run-up to 1929’s crash—with look out below being the general implication. In early 2016, folks tortured data to make the Fed’s balance sheet look identical to the S&P 500’s rise since 2008, implying tough times once the Fed started shrinking its portfolio. Now they are at it again! Last week, Fed meeting minutes revealed plans to start letting the balance sheet shrink at a fast clip in May. Queue another fast-circulating chart claiming the Fed’s balance sheet and stocks are highly correlated, setting stocks up to fall once the Fed starts shedding assets. Please let us dismantle this.

Today, as in 2014 and 2016, the viral chart seems to hinge on a long-running error: It employs two series on separate y-axes that feature a range and scale that makes them look identical. We like using separate y-axes now and then when we think it provides more clarity than indexing everything to 100 and keeping it on one axis. We will also truncate y-axes to improve visibility when necessary. But we do our best to keep it clean—especially when we are trying to argue two things are closely related.

That, however, is what the offending charts fail to do. Exhibit 1 shows our recreation of 2016’s version. As you will see, we started the Fed axis at $800 billion and ended it at $5.2 trillion. That is how we were able to make it look exactly like a raw graph of the S&P 500 price index, with the two lines starting and ending in roughly the same place. If we hadn’t chopped off that $800 billion and arbitrarily selected an endpoint, it wouldn’t work.

Exhibit 1: An Example of a Skewed Chart From 2016


Source: FactSet and mischief, as of 4/13/2022. Total assets on the Federal Reserve System balance sheet and S&P 500 price index, weekly, 1/2/2009 – 12/31/2015.

Exhibit 2 shows the modern version. In this one, the main goal appears to be getting the lines to end at around the same place. That required two tricks: starting the S&P 500 axis at 750 and placing the endpoint six equal increments away—stretching it vertically to match the balance sheet, whose axis spanned 10 equal increments. At least it wasn’t tortured further to get the lines to start in the same place, but it still violates some cardinal rules, in our opinion.

Exhibit 2: A Tortured Chart of Stocks and the Fed’s Balance Sheet


Source: FactSet and tricks, as of 4/13/2022. Total assets on the Federal Reserve System balance sheet and S&P 500 price index, weekly, 1/2/2009 – 4/8/2022.

Pundits across the Internet have used this chart to argue the S&P 500 and the Fed’s balance sheet are highly correlated. But that misunderstands correlation, which isn’t about whether two lines look roughly similar. Correlation refers to the frequency at which two series actually move together. That means you can’t just take the correlation between two data series levels, such as the Fed’s total balance sheet and the S&P 500 Index price level. You have to measure the correlation between the changes in each over set intervals. When we measure correlations, we think using the weekly change is most accurate, as it doesn’t gloss over volatility. Conveniently, the Fed also reports its balance sheet weekly (ending on Wednesdays).

When using this methodology to measure the correlation between the Fed’s balance sheet and S&P 500 since quantitative easing began in January 2009, we get a correlation coefficient of 0.036. What does that mean? Well, a correlation of 1.00 implies two variables move in lockstep, -1.00 implies they move in opposite directions always, and 0 implies no relationship. A correlation of 0.036 is about as close to zero as you can get.[ii] That means there is basically no relationship between changes in the Fed’s balance sheet and the S&P 500. Don’t like the weekly frequency? Even calculated monthly, the correlation is just 0.12—not statistically significant.[iii]

Which shouldn’t surprise, considering the last time the Fed stopped increasing (and eventually shrank) its balance sheet, stocks went up. Exhibit 3 shows this in a properly constructed way, with the Fed’s balance sheet and S&P 500 index price level indexed to 100 at October 13, 2014, which is when the Fed stopped its post-financial crisis quantitative easing (QE) program. We take it through the end of 2019—after the Fed stopped running down its balance sheet in August 2019 and before COVID lockdowns caused wild swings in both stocks and the Fed’s balance sheet. And we started our y-axis at 60 to give you a more zoomed-in look. As you will see, one of these lines is not like the other.

Exhibit 3: A True-to-Scale Look at Stocks and the Fed After QE


Source: FactSet and high standards, as of 4/13/2022. Total assets on the Federal Reserve System balance sheet and S&P 500 price index, weekly, 10/31/2014 – 12/27/2019. Indexed to 100 at 12/31/2014.

If you would like a detailed explanation of our thoughts on the “why” behind Exhibit 3, we invite you to revisit last week’s article on the Fed’s meeting minutes. But in short, we think all the chatter about QE fundamentally errs in presuming it was stimulus and shrinking the balance sheet is “tightening.” QE lowered long rates, which flattened the yield curve. Over 100 years’ worth of economic theory and data show flattening the yield curve means slowing economic growth. When the Fed stops reinvesting the proceeds of maturing bonds, it puts less pressure on long rates, which allows the yield curve to steepen—which we have seen in recent months, as markets priced in QE’s end and eventual reversal. That same theory and data show steeper yield curves are a big economic positive. Solid economic growth helps pad earnings growth, creating a reality much better than the QE-obsessed world expects. That was a positive force throughout the second half of the 2010s, and we think the stage looks to be set similarly now."

MY COMMENT

A perfect example of REALITY versus FANTASY......or in some cases INTENTIONAL DISTORTION of the facts to push an agenda. This is exactly why you need to be careful accepting investment arguments from the internet.

It is likely that people that push this sort of distorted and inaccurate data dont even know it is PHONY. But....on the other hand many people that try to sell their view using this sort of stuff......DO.....know that they are being deceptive.