Stock Prices and the Fed

People have been citing recent record-highs in the U.S. equity markets as a refutation of the naysayers. It’s worth looking at the still tight connection between the S&P 500 and the Fed’s “monetary base” (a measure of high-powered money) since the rounds of QE began (see image above).

It’s true that even according to the above correlation, U.S. stock prices in recent months have risen above the level we would have expected. But I think it is still crystal clear that the boom in asset prices since 2009 is largely driven by the Fed’s monetary inflation, rather than a genuine recovery.