Government stimulus drove most gains of past 10 years

You’ve probably seen this chart showing the striking relastionship of the S&P 500’s gains in the past decade to Federal Reserve stimulus phases 1, 2, and 3. But perhaps you’ve wondered if that’s just a coincidence.

Well, the fourth quarter of 2018 made clear it’s no coincidence.

2019 S&P 500 vs stocks.gif

We’ve marked periods on the chart as easing, pause, and tightening. Then we graphed these periods by average S&P 500 weekly return in the period vs weekly Fed stimulus in that same period, and ran a regression.

2019 returns vs Fed stimulus.gif

The result is that ~93% of the S&P 500’s gain over the past 10 years can be attributed to Federal Reserve stimulus. Data scientists call this a slam dunk sort of relationship. Rarely is such correlation between such cause and effect found in the real world.

Now that the Federal Reserve is unwinding its balance sheet and looking to continue raising interest rates, what does this mean? More stock market volatility to come, for sure.