Thought Experiment

| June 01, 2018
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While your thoughts this Friday morning may be turning to the weekend (or a two day soccer tournament in the rain), I want to offer some data to chew on.

There was a formula developed by Larry Jeddeloh at TIS Group to attempt to gauge the impact of the Fed’s Quantitative Easing (QE) on the S&P 500 gains during the bull market.

He was looking to translate the burgening Fed Balance Sheet and the move higher in stocks.

The TIS model showed that every “$100 billion in QE has translated into 40 S&P 500 points.”

As I have mentioned several times that Fed has switched gears to Quantitative Tightening (QT) in order to ‘slowly’ unwind their bloated balance sheet.

In QT, the Fed has committed to sell (for now) bonds back into the market and suspend the reinvestment of maturing securities.

The Fed sold around $60 billion of Treasuries and Mortgages in the first quarter of 2018. This is to be followed by increases to $30 billion in the 2nd quarter, $40 billion in the 3rd quarter and $50 billion in fourth quarter, IF the Fed still has the runway to slowly normalize their balance sheet.

If the TIS model held true in reverse there should have been approximately 24 S&P points of equity headwind (negative return) during the quarter.

Well in the first quarter of 2018, the S&P 500 actually fell 33 points.

Mark Yusko highlighed his thoughts in his latest quarterly memo:

We will know more in a few months, and it could be a very interesting fall as the total of $420 billion of Fed tightening during 2018 would mean 168 points (6.4%) of headwind for U.S. equities. 

The question to ponder is will this high correlation hold true in reverse?


Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O

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