Historically, we have seen a few indicators from the Federal Reserve (Fed) for forecasting stock market returns. One of these was positive stock returns in the day or two surrounding the release of Federal Open Market Committee meeting minutes. A less-watched indicator is particularly interesting – one from the St. Louis Fed, which it publishes on its ‘Fred’ website.1
The St. Louis Fed’s adjusted monetary base chart is a favourite of inflation hawks, aghast that the monetary base has quadrupled since 2008, increasing $3.1 trillion from the Fed’s massive quantitative easing.2 If you plot the recent history of S&P 500 returns against the monetary expansion over the past few years, it makes an artful case for QE-induced asset price inflation. Since the Fed ended its QE party, the monetary base has been relatively flat; will the S&P500 returns flatten with it? 3
Jason Lejonvarn – Mellon Capital, a BNY Mellon company
2: The adjusted monetary base is meant to reflect changes in demand due changes in reserve requirements of the relevant depository institutions.
3: While the adjusted monetary base has varied over the last two years it is now at the same level it was in early March 2014, $3.9 trillion.