Stock investors have become addicted to quantitative easing. Everyone has been tracking the close relationship between the S&P 500 and the Fed's holdings of securities since the start of the bull market in early 2009. The bears have been warning that when the Fed starts to taper QE and terminate it, the bull market will be terminated as well.
While the S&P 500 has been highly correlated with the Fed's purchases of U.S. Treasury and mortgage-backed securities, it has also been highly correlated with the sum of share buybacks and dividends paid by S&P 500 companies. The bears have been saying that the bull market has been a “sugar high” with no obvious buyers. Fed Chairman Ben Bernanke has been the sugar man, injecting the sweetener into stock prices with his ultra-easy monetary policies, especially QE.
The bears failed to either notice or acknowledge the huge injections of cash into the stock market by corporations. From Q1 2009 through Q2 2013, S&P 500 companies repurchased $1.5 trillion of their shares and paid out $1.1 trillion in dividends for a grand total of $2.6 trillion.
The Fed has pulled back from tapering QE for now, while corporations continue to announce lots of share buybacks and higher dividend payments. Life is good.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.