Will The Fed Pop The Stock Mbb forex rate Bubble? P 500 has grown through this time period at a rate of 7. Since early 2010, nominal GDP grew 3.
The Fed balance sheet, net of excess reserves has grown 7. Since 2010, the Fed balance sheet, net of excess reserves, has grown 9. This article examines the question of whether the Fed can escape the stock market bubble that its new policies have helped to create. The stock market since early August has pulled back from record highs. If the market follows the trend of the past 8 years, the respite will be shallow and short in duration. Like many investors, I tend to be skeptical when a financial asset goes perpetually upward, particularly stocks.
Within reason, the US stock market does have an upward bias, rising with the growth of the economy throughout history. The fact that the US economy has continuously grown over an extended period of time, albeit at a slow pace, has made investor expectations build that stocks will continually move higher. However, investing is not just about making momentum trades and getting out before the crash. Knowing when assets are overvalued is a key to successful portfolio management.
As shown above, annual US GDP growth since 1952 has been 6. The two measures in different time periods clearly diverge, such as the high interest rate period of the 70s and 80s, and the more recent spikes that include the DOT com boom and the 2008 Financial Crisis collapse. However, through time stock valuations tend to be tethered to reality as measured by the US GDP. Most recently, the stock market has entered a new period of divergence that I believe will produce the next financial crisis, the magnitude of which is dependent upon how much longer the current distortion in the market is allowed to continue. If you review the growth in GDP since early 2010, you will find nominal growth of 3. On the other hand, stocks have catapulted higher, growing at 11. The 8-year pattern in which stocks have perpetually grown much faster than the economy has now placed the market in an untenable position.
To justify the current valuation level over the long term, real economic growth must take off. Otherwise, the current stock market speculative bubble will pop. How Did the Stock Bubble Get Created? What has caused stocks to race upward in value well beyond economic reality? American consumers financed by hot money.