{"id":57594,"date":"2021-08-22T13:52:53","date_gmt":"2021-08-22T20:52:53","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=57594"},"modified":"2021-08-22T14:03:08","modified_gmt":"2021-08-22T21:03:08","slug":"what-if-stock-markets-value-is-fed-adjusted","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2021\/08\/22\/what-if-stock-markets-value-is-fed-adjusted\/","title":{"rendered":"What If the Stock Market’s Value Is Fed-Adjusted?"},"content":{"rendered":"\n

The Stock Market’s Value<\/strong><\/h2>\n\n\n\n

The U.S. Federal Reserve’s dual mandate<\/a> is stable prices and maximum employment. Yet, when the Fed sets monetary policy, the most direct and immediate impact plays out in financial markets. When the Fed eases monetary policy, the dominant theme the last 20 years, asset prices invariably increase. Indeed, over the years the stock market looks increasingly dependent on easy money policies. Accordingly, what happens if the stock market’s value is Fed-adjusted? When easy money policies increase the Fed balance sheet, liquidity in financial markets generally increase. Market participants use the extra liquidity to purchase assets. A Fed-adjusted valuation is akin to adjusting GDP growth by inflation. The resulting Fed-adjustment creates a stock market value that has essentially gone nowhere since the extraordinary Fed interventions of the 2008\/2009 financial crisis.<\/p>\n\n\n\n

\"U.S.<\/a>
U.S. Stock Market Capitalization per Dollar Of Fed Assets: the stock market’s value has changed little since the 2008\/2009 financial crisis.<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

For those that believe like I do that the Federal Reserve helps to prop up the stock market, the graph above of the stock market’s value adjusted for the Fed’s balance sheet provides a powerfully affirming symbol. Of course, two assets increasing at the same time does not prove cause and effect. The parallel moves could represent spurious correlation. However, in this<\/strong> case, the mechanism that feeds Fed asset purchases into higher asset prices in financial markets is well-understood and fully acknowledged. Accordingly, the above graph has value and meaning.<\/p>\n\n\n\n