Agency QE and Market Performance Correlation?

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Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Agency QE and Market Performance Correlation?

This recent article over at Zero Hedge discusses the upcoming end of QE, at least as far as the purchasing of Agency debt is concerned:

http://www.zerohedge.com/article/federal-reserve-balance-sheet-update-we...

What strikes me more than anything is what looks like a pretty good correlation between the Fed's Balance Sheet and market performance, starting after the initial mega-ramp-up at the end of 2008. 

After that, it looks like the Fed's liquidity injections may pre-date market performance by a bit, - 2-3 months maybe, but other than that, the correlation appears pretty tight.  I wish someone would superimpose the SP and the DOW on this chart.  Notice the dip in the Fed's balance sheet in what looks like early February.  The market lows occured in March 2009, then performed well until July, which coincides with a dip in the Fed's Balance Sheet shown below as well.  More recently, the equity markets have been characterized by a "rolling top" formation which looks very much like the Balance Sheet below.  With the Fed's Balance Sheet growth winding down, I can't help but agree with the caution suggested by this ZH article.

I know it's not perfect, and the equity markets are not as smooth-looking as this chart, but it does look like a pretty tight correlation. 

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/summers/Fed%20Balance%20Sheet%20March%203.jpg

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