“The Fed’s easy monetary policy has led to overvalued equities”
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A couple of weeks ago, we posted Feldstein: Stocks are headed for a fall …
Now that the stock market has “corrected” by over 10%, it feels like time for a flashback.
Feldman called it … and, decades ago, I had researched (and confirmed) the basis of his forecast.
So, did Iact of Feldstein’s prognostication?
Of course not …
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Let’s start by taking a stroll down memory lane ….
Over 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 (think: big, hairy financial model) that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.
That is, when the Fed adds liquidity into the market (think: “quantitative easing”), much of money flows into the stock market – rocket-boosting stock prices.
And the opposite is true. When the Fed tightens, stock prices fall back into earth orbit.
OK, fast forward to today.
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