09/06/2016 - How Much Of The S&P 500 Stock Index Is Due To Central Bank Stimulus?
Deutsche Bank’s Dominic Konstam writes over the weekend, “various Fed officials have raised the issue of financial stability in the context of the reach for yield and riskier products to make up for low rates. This is part of financial repression. The logic might be that once the Fed has normalized, elements of that reach for yield and risk would be unwound and this could lead to disruptive financial market volatility.” .. the worry is that once interest rates go up, stocks will crash .. “We can illustrate this aspect of financial repression in terms of the equity market. In the post crisis world, all assets seem closely correlated to breakevens and real rates but with varying betas. We note that the equity market recently looks very expensive even to these rates through the shift in the beta on inflation expectations – so despite low inflation expectations, equities have done even better than otherwise warranted by low real rates. This shows up as a fall in the equity risk premium and defines well the hunt for yield in a repressive financial regime. How does the decompsition of performance look visually: we can illustrate the extent to which this is unprecedented with the historical performance of the equity market. Decomposing equity returns into earnings growth, changes in P/E and changes in the risk premium shows that the bulk of equity performance is best captured by the shunt lower in equity risk premium .. Central bank policies are directly responsible for approximately 40% of the ‘value’ in the market, and any moves to undo this support could result in crash that wipes out said ERP contribution, leaving the S&P500 somewhere in the vicinity of 1,400.”
LINK HERE to the article
