And Now We Know For Sure What's Really Been Driving The Market For The Last Few Years...
by Joe Weisenthal
Ideas get bigger when you share them...
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August 17, 2012 (Investorideas.com newswire) eResearch Corp Reports: Here is a chart we have probably run about 100 times. It shows the S&P 500 (blue) vs. the inverse of initial claims (red) going back about 5.5 years.
As you can see, the two lines have moved very closely together. The point is not that initial claims are all that matters, but the correlation does suggest that what's really driving the market are the real fundamentals of the economy.
It also suggests that other stuff like Europe headlines and Fed chatter are less important for the stock market than they are generally given credit for.
The latter point, the impact of the Fed on markets, has been a source of tons of controversy and attention, as anyone who turns on CNBC for 5 minutes is well aware of.
So, if it can be established that the Fed is not really itself a huge driver of the market, than this would be a significant break-through on what is making the market tick.
Unfortunately, the above chart does not quite resolve the question.
Here is why. If we narrow the range of the chart to just 2010, this is what we see.
For the most part the lines match up pretty well. Initial claims and the stock market improved in the beginning of the year. Then initial claims and stocks weakened in the middle of the year, and then both improved solidly starting at the end of the summer.
But here's the problem. QE2 was also launched at the end of summer 2010, so some people might say: The stock market rose due to the economy improving, while others will say : the stock market only rose because right at the same time, the Fed began its infamous asset purchase program.
There is another possibility, which is that the Fed itself, by doing more easing, caused initial claims to improve at the end of summer 2010, meaning all three are inter-connected.
We run into the same problem in 2011.
The chart is obviously noisy, but it is actually pretty nice. The stock market improved nicely through the first third of the year, and initial claims did too. Then both dipped into the summer. And now both are improving.
But finally we have our "control" year that is different than 2010 or 2011 because expectations of QE have been collapsing.
First of all, the Fed's last two meetings have clearly been more hawkish than people expected. There has been virtually no new action, and even the language has not been as dovish as some have predicted.
Today, Goldman's Jan Hatzius threw in the towel, and said there would be no more QE this year.
Bank of America did the same, citing yesterday's strong retail sales report.
In a note out last night, BTIG's Dan Greenhaus included the following read on investor concerns:
...we're starting to get questioned as to whether "investors are rallying themselves out of a QE3" and what effect this might have on the Chairman at Jackson Hole.
So buy-side investors think QE might be off the table, and Wall Street economists no longer expect more easing to happen this year.
And yet! Markets are rising along with improving fundamentals.
We are getting a real-time lesson: Improvements in the economy translate into improvements in the market. The obsession with QE, and whether bad data is good because it might cause the Fed to ease more, is mostly a noisy distraction.
Prior to joining Clusterstock, Joe Weisenthal was a correspondent for paidContent.org, as well as the Opening Bell editor at Dealbreaker.com. He previously was a writer and analyst for Techdirt.com and, before that, he worked as an analyst for money management firm Prentiss Smith & Co. He got started writing with his own infrequently-updated blog, TheStalwart.com. Mr. Weisenthal is a graduate of The University of Texas at Austin.
To Read Complete Research Report from eResearch Corp (www.eresearch.ca): The eResearch for Business Insider