Yesterday’s discussion of the intensity and duration of bull markets — and the current powerful market — led to an interesting question: Exactly how much has QE1 & 2 impacted stocks?

The Fed’s historically unique monetary policy is obviously a factor in the current market — but how much?

Perhaps we can fashion a guess looking at duration and intensity of market moves.

Let’s use the averages of the rallies over 12 and 24 months, going back to the 1930s: After 12 months, returns range from  21.4% (1987) to 121.4% (1932). But its worth noting that the other post-depression rally (1935) was 81.4%; remove these two outliers, and the next most intense move was 1982 at 58.3%. That is, until the 2009 rally. After 12 months, it stood at 68.6%. The average of these rallies at the 1 year mark was 47.3%.

After one year, we had a rally that was 20% stronger than the previous post-WW2 rallies, but not as strong as the post depression rallies.

Looking at these rallies after two years is where things get very interesting: On average, the rallies strengthened, from 47.3% to 56.1%. This despite by month 24, the two post depression rally outliers had given up all their gains and were in the red.

I have been saying for several years now that 1973-74 is an excellent parallel to the current crash/recovery. And indeed, up until 2009, the strongest rally from post Great Depression was 1974 — at 65.7% after 24 months.

Until 2009. After just 22 months, this market broke through the 90.1% level. No other rally even comes close, and 1974 as the runner up. The current run is a full 37% greater than the next closest rally, and over 60% greater than the 2 year average.

How much of this is attributable to the Fed? Its only a guess, but if merely half of the markets excess gains (over the past rallies) are attributable to the Fed,it means that the US Central Bank has artificially created several trillion dollars in market capitalization.

The end game of this, and the unintended consequences, are beyond my ability to guess . . .


Tables after the jump . . .

Courtesy of Investech Research

Category: Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “How Much Has the Fed Distorted the Stock Market?”

  1. GreatWarrior says:

    Barry, the BurnMonkey is more evil than you think.

    Statistically, the 121% 1932 rally was due to a 89% collapse, and therefore a 121% run up. This time, SPX just dropped ONLY 57% and it rallied 90%+.

    That speak to INTENSE influence or Manipulation of the stock market, as that Monkey itself had confessed.


  2. MayorQuimby says:

    The better question is….how much does the Fed distort everything? Answer is…a LOT.

    Excessive Fed printing/liquidity prevents economic imbalances and distortions from correcting. It allows governments to run up huge deficits and pay out tons of goodies to companies, unions and banks all of whom then pay a % BACK to the politicians to get elected. One giant fuckfest of corruption.

    Fiat currency is SUPPOSED to be backed by TWO THINGS – collateral (ie the car pledged as collateral for a car loan) and the pledge to make something yourself so you can pay back that loan. So as new money is initiated by loans it is backed on the front end by existing wealth and on the back end by future wealth.

    But no….politicians don’t get elected by promising tight budgets and frugality – they get elected by PROMISING CANDIES AND GOODIES TO EVERYONE.

    So…the Fed steps in and makes that possible.

    Which is why the average American owes $45K+ in national debt and double or triple that in underfunded liabilities. Then there’s college tuition prices, food, gas, oil, heat, electricity prices – ALL unaffordable.

    So what do we do instead of letting prices correct to affordable levels?!

    We put GREEN-NANKE in there to PREVENT said asset price correction. So everything remains UBER expensive.

    IOW – you can’t put your kidz to college so we’ll allow you to BORROW $200K into existence which basically impoverishes YOU for 20 years while the colleges and elites enjoy that new money since it all immediately goes to them.

    They then sit around on CNBC talking about how wonderful the Fed is and how great America is and how bullish everyone should be – OF COURSE – THEY ARE ON THE RECEIVING END!!!

  3. godot10 says:

    My hypothesis is that the S&P is “strong” because the “euro” is weak, and will get weaker.

    Any doomed major currency (like the Euro) turns large global non-financial companies into “hard” assets. And the US government has the banksters backs, and won’t let the banks fail. Hence the S&P relative to the euro should be strong.

    US debt and deficits mean that euro flight is to stocks, not US debt.

    Just an hypothesis.

  4. MayorQuimby says:

    All money is credit (‘cept cash) and therefore – all of it can collapse to zero. Remember that.

  5. rktbrkr says:

    The Fed is engaged in mission creep and their spokesman has publicly stated that they want to maintain high asset values.

    Their QEx of 1-1.6T has pumped up an artificial bull market IMO and the FED has had the “luxury” of gradually inflating these asset values, what will happen when they reverse their course and have to pull the $1.6T out of the system and they have to pull it out before interest rates rise 1/2% and wipe out all their capital.

    I think the answer is they don’t plan to withdraw all the funny money they have created and they have accepted inflation as way to cheapen US debt and combined with a continuing COLA freeze on Soc Sec duck existing entitlement obligations. Any other course would create huge losses for the fed and possibly collapse the high asset vales they favor.

  6. grimreaper says:

    You are correct, your honor. These are far from the markets I knew in the 60s-80s, though they were manipulated, too. But not so much, nor so noticeably. If, in this beyond information-overloaded world, we could know every last detail of every pertinent thing that is so inextricably interrelated, we would still not know when.

    Apologies to all for agreeing with the gloom and doomers, but this can’t end well. Surely it is just a matter of time.

    Please don’t call me Shirley. I will further make what will be viewed as the single, stupidest statement ever made on these forums: I would rather be right, than make money.

  7. Petey Wheatstraw says:

    As there has been no resolution of any bad debt and as so much new bad debt has been added to the “money supply,” I’d say the Fed is more than 100% responsible for the current bubble.

  8. Ted Kavadas says:

    RE: “…it means that the US Central Bank has artificially created several trillion dollars in market capitalization. ”

    IMHO this begs the question as to whether the stock market is experiencing a bubble.

    QE2 carries with it an array of unintended (negative) consequences. I have written of a number of them; one of the main adverse consequences is the formation of asset bubbles.

    Here is one of my blog posts on the issue for those interested:

  9. Mannwich says:

    A very Onion-worth headline, BR.

  10. machinehead says:

    ‘This despite by month 24, the two post depression rally outliers had given up all their gains and were in the red.’

    This interpretation is slightly misstated. Let’s take actual monthly S&P price data, which are posted at Professor Schiller’s website in an Excel file:

    Jun ’32 … 4.77
    Jul ’33 … 11.23
    Mar ’35 … 8.41
    Mar ’37 … 18.09
    Mar ’38 … 10.31

    Neither of these rallies, as defined, gave up all their gains. Rather, according to Jim Stack’s definition, they were ended by a 20% bear market decline. But neither retraced all its gains before the next bull market started.

    Personally, I would count the whole episode from June 1932 to March 1937 as a single bull market. It was extremely volatile, so the standard ‘bear market’ definition of a 20% decline breaks it into misleading pieces.

  11. MayorQuimby says:

    “IMHO this begs the question as to whether the stock market is experiencing a bubble.”

    Everything is relative. It is not a bubble if compared with liquidity. It is a bubble if compared with nominal wage growth Yoy.

    “Wealth effect”. Well, there’s your answer. Of course it’s a bubble. Ben’s intent is to make bubble peak pricing for everything normal by reflating the system (injecting credit). Ben thinks credit is money. It is not. And this is why he will fail and it will be an epic fail for all time (imho).

  12. louis says:

    I wonder what they could do for housing to have values rise 90%?

    It is rigged more that a Tim Donaghy basketball game.

  13. rn says:

    You are looking at federal reserve in isolation. You need to look at the combination of federal and congressional policies.
    You may not like to hear this. But the very purpose of federal reserve is to “manage” the interest rate term structure.
    In the absence of appropriate fiscal policy responses, federal reserve is forced to shoulder the full responsibility, respond unilaterally and that usually translates into asset inflation.
    I believe the failure is squarely in the hands of congress due to either ignorance, partisanship or personal priorities.

  14. Sechel says:

    If we’re to believe the Fed that QE2 resulted in a substitution effect whereby sellers of Treasuries buy stocks then this may reverse when QE2 ends or if rates go up sufficiently. Or if the Fed conned the market to front run and buy stocks on the basis of QE2 then I think the downside is even worse when nobody wants to be last guy in.

  15. Petey Wheatstraw says:


    All three branches of our government have been captured by corporatist interests. The Fed is complicit.

  16. ironman says:

    BR: There might be a better way to visualize the effects of the Fed’s QE programs, which you can best see by what happened to the change in the rate of growth of stock prices with respect to the change in the expected future rate of growth of their underlying dividends per share in the absence of the Fed’s QE program from April to September 2010:

    Completing the Loop, Take 2

    And here’s a closer look speculating that these things are what the Fed is looking at when it uses the stock market to gauge how well it’s managing inflation expectations:

    Completing the Loop, Take 2, Part 2.

    The way the Fed might look at this is that if the acceleration of stock prices is below where the amplified acceleration of dividends per share would place them, they need to increase their QE activity. Should the acceleration of stock prices go above where the amplified acceleration of dividends per share, then they really need to take their foot off the pedal.

    Keep in mind – they’re not targeting stock prices, but using them as a means of gauging whether they’ve managed future inflation expectations to be where they’ve largely kept them since 2000, which in turn, makes the market more predictable. There’s a reason why our last several forecasts have been uncannily accurate.

    (At least, aside from a soon-to-come, rather short-term correction, that is! Today might be a pretty good selling opportunity.)

  17. withere says:

    The end game of this, and the unintended consequences, are beyond my ability to guess . . .

    You were on tv today saying your at 50% cash, it seems your ability to guess is alive and well.

  18. call me ahab says:

    How much of this is attributable to the Fed? Its only a guess, but if merely half of the markets excess gains (over the past rallies) are attributable to the Fed,it means that the US Central Bank has artificially created several trillion dollars in market capitalization.

    as Tepper said- it’s a no brainer- just buy because everything will go up-

    it’s that simple-

    artificiality? Puhlease . . . .Bernanke has this down cold- what could go wrong?

  19. [...] = ";section=homepage;" : __halnet_pub_kvs = ";;"; // var __halnet_zone = "ROS"; « How Much Has the Fed Distorted the Stock Market? Life After Capital [...]

  20. Low Budget Dave says:

    If you look at the actions of the Federal Reserve, your first impression would be that they exist to protect the stock market. It you were to make a chart of interest rate policies, in particular, you would have a hard time proving the claim that the policies were designed to protect the economy, the money supply, or anything else besides Wall Street bonuses.

    In November of 2002, for example, the Federal Funds rate was dropped to 1.25%. This was a response to the stock market decline, and had nothing to do with the economy. “Unemployment unchanged at 5%” is hardly something that triggers immediate concern at the Fed. But when they read “Wall Street Christmas bonus payments are set for a big decline”, the Fed swings into action.

  21. Transor Z says:

    Dude, just think what a 30-year 4.6% fixed will translate to in 15 years if inflation so much as slightly exceeds 20-year avg. And housing is STILL in slight decline.

  22. Patrick Neid says:

    We are left with what was thought to be never possible again–1907. Here we are still right on target. Even the copper market was in play then!

    The question has to be asked, are we going to also blow this last analog away? “Don’t fight the Fed” as coined by Marty Zweig used to involve billions. If cash is fuel and some of the prior correlations still hold, it is not out of the question that new highs are in the bag. At first glance, absurd, but we are dealing with trillions depending on who you talk with.

  23. hue says:

    shirley, you wouldn’t rather be right. all our times have come

  24. The end game of this, and the unintended consequences, are beyond my ability to guess . . .

    As long as people are in on the deal or believe they are in on the deal and are willing to accept the deal, then things will continue along as they are. As long as people are willing to take paper for their servitude and that paper buys them what they gauge as a reasonable form of freedom and lifestyle then the game will continue.

    If the paper ever stops flowing or stops funding the lifestyles and the ‘freedom’ to serve, then lookout!

  25. Cynic_FA says:

    I love this topic. Last week’s “are you a bull or a bear” was so wshy washy. Here we can dig deeper, is the market up because it should be, or are stock prices manipulated by the Fed. Let’s go all the way, I believe all assets prices are manipulated by the Fed to a huge extent. I agree with Barry that at least half the outperformance of 2009-today over post recession average is directly tied to the Fed money hose (or helicopter). Housing prices nation wide are probably 20% above where they would be without Fed purchases of money, US backdoor bailouts via Fannie and Freddie, and mortgage rates manipulated below 5% for 2 years. What about taxable bonds, 20% or more of the price rally from Jan 09 is directly tied to the fed.

    Next question: do you object to the Fed manipulation and demand that it stop? Or, of course the Fed bid up the prices, but my portfolio and my bonus check are loving it.

  26. Cynic_FA says:

    Who do you love? Ben “Helicopter” Bernanke or Ron “Shut Down the Fed” Paul?

    I would tell you how disgusted I am with the reckless Federal Reserve, back to the Greenspan Housing Bubble and the “T as in Trillion Fed of Bernanke (Should we call him “Trillnanke”?, but… My rant might slip over into the discussion of crosshairs and job killers and the FBI( or at least MSNBC) would be at my doorstep.

  27. grimreaper says:

    Not to raise a ruckus, but see this link from The Daily Bail (if you haven’t already:)

  28. HarleyHoward says:

    Another question for Barry – With this monetization of debt continuing and the inherent devaluation of the dollar driving the prices of all assets higher, when does the bubble burst?

  29. HarleyHoward says:

    I looked at the suethefed site, and the question I have is – Who is more dangerous, the fed or the rapacious idiots in Congress?

  30. grimreaper says:


    Thanks for the tune. Always struck a chord in me (ha.) A great one.

    Harley Howard,

    “…the devil you know, or the devil you don’t know?” Not exactly a Hobson’s choice, more like a dilemma. I hazard to say “the rapacious idiots,” ‘cuz they’re bought and paid for…by those who sit on the board of the Fed.

    Chicken or egg? Too much for me to fathom, but I come here to try….

  31. spencer says:

    I always taken the position that the fed influenced or drove the market through the PE side of the equation,
    i.e., the PE is inversely proportional to fed funds.

    But based on that premise, the PE has only risen from a low of some 13 to a little above 15 –on trailing operating earnings– and this implies that the Fed has had very little market impact,especially by historic standards when the rise in the PE in bull markets was much greater..

  32. mathman says:

    Flooding of the banks and corporations with cash, flooding in many places (Brazil, Australia, and more) – the devastation to linger for years.

  33. [...] Has the Fed’s QE affected the stock market? Posted on January 22, 2011 by InvestingforOne This is a question asked today by the respected analyst and blogger, Barry Ritholtz, in his post, “How Much has the Fed Distorted the Stock Market? [...]

  34. Onthemoney says:

    In October last year Tom McClellan posted an interesting study on the POMO effect and has an fascinating graphic comparing the S&P500 chart with how it would look if it had only traded on non-POMO days. As a rough ‘n ready visualization of what an un-manipulated stock market would look like, it’s an eye-opener.

  35. sue806 says:

    Stop paying for your neighbors’ mortgage or Wall Street bonuses by signing this petition. was created to petition the government to STOP their current policy of socializing the losses at the taxpayers’ expense that allow the profits to remain Wall Streets’. Which is absurd when ninety eight percent of American citizens have been financially hurt by the housing and foreclosure crisis, signing this petition allows your voice to be heard:

    *If you have negative equity regardless of being current or delinquent (negative equity is when you owe more than your house is worth losing your ability to build your own “equity” fund as you pay down your mortgage balance monthly, basically there is no financial benefit to remain a negative equity homeowner except your mortgage payments are paying Wall Street their profits.)
    *If you lost some of your equity “fund” (wealth) that you were planning for your retirement or will become one of the 48% of homeowners affected by negative equity as housing values decrease another 10-15% in 2011 per leading industry researchers
    *If you had your income reduced
    *If you lost your job
    *If you are worried about losing your job including those jobs that will be lost because of the” budget cuts”
    *If you don’t agree with the government that a negative equity homeowner is entitled to a lower rate or principal reduction because they bought a house they couldn’t afford or no longer can afford that you as the taxpayer should have to pay for
    *If you believe you are entitled to a similar financial advantage because you have negative equity (you are)
    *If you don’t believe that Wall Street has the right to choose who or how much negative equity homeowners should “benefit” based on what the homeowner will accept or can pay, making you as the taxpayer responsible for their losses, they don’t
    *If you lost money in the stock market or your pension was or is still invested in the mortgage and/or bond market
    *If you are worried that your grandchildren will have to pay for our unregulated capitalistic mistakes that have raised our national debt to a staggering level and the list goes on. The 98% of us affected have the legal right to sign the petition demanding that capitalism and existing laws are enforced protecting Main Street from Wall Streets actions and abuses.

    The one capitalist rule that all homeowners had understood and agreed to is, if you didn’t pay your mortgage for any reason, you were foreclosed on. When negative equity occurred no homeowner was entitled to a lower interest rate or a principal reduction UNTIL the financial industry changed the rule by modifying over 3.5 MILLION negative equity homeowners setting the precedent THEN ALL negative equity homeowners(similarly situated parties) BECAME legally entitled to a similar financial incentive (benefit) of a negative equity modification if the law was followed.

    Increased banks profits will not help Main Streets recovery. But bringing back the principle that “no one is above the law” will. It will allow ImNotLeaving Streamlined Uniform Modification System to return the mortgage (negative equity) losses to their rightful parties creates a taxpayer free cash stimulus of over six billion dollars each and every month for Main Streets economy without costing the taxpayer one cent and is a “shovel ready project” representing hundreds of thousands of jobs created within weeks, not months or years boosting Main Streets economic recovery now.

    While capitalism, the law and the precedent set allows for every negative equity homeowner to be entitled to a similar financial incentive to remain a negative equity homeowner WE, the undersigned taxpayers are respectfully requesting that all taxpayer paid support of Wall Street made thru back door deals, subsidies and / or guarantees are immediately STOPPED with our endorsement of this petition. Easily accomplished by a vote or even note from our congressional leaders to our taxpayer owned, Goverment Sponsored Enterprises that THEY must follow the law (as the industry leader of over 50% of all outstanding mortgages) before Wall Street will follow. Without a leader to follow there is no change.

  36. hue says:

    ya welcome grim, one more thing

  37. crunched says:

    And the joke is the ‘average investor’ has participated in maybe half to none of this rally. By attempting to be so clever the Fed has inadvertently excluded the one subset of the population it should have been helping if any ‘recovery’ was to be sustainable.

    Now… with the markets so distorted and full of risk at these levels, all the boomers retiring have nowhere to grow their money, especially now that the bond market will surely get decimated sooner than later thanks to the Fed’s policies. My opinion is that ultimately the Fed/inept Congress/banks will have created a monster that is far, far worse than the great depression because of their meddling and manipulation.

  38. [...] My takeaway: • How much the Fed has distorted Equity markets. [...]