The Homa Files

This was a week that market analysts retroactively tag “a long anticipated correction”.

Yeah, right.  That’s what you guys have been saying.

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This week’s market dynamics beg a bigger question:

Why, given a sluggish economy and DC disarray, did the stock market keep marching forward to record highs … that met their come-uppance this week?

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”.

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 near 16,000 despite a sluggish and uncertain economy.

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This entry was posted on August 28, 2015 at 6:59 am and is filed under Finance & investing, Financial Models, Ken - Misc., Stock Market, Supply of Money & Common Stock Prices. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.