What’s It Worth?

 June 17th Weekly Market Update

What has mattered most to the market in recent years? What has explained the ups and downs and how the market got back to all-time highs? There are a lot of drivers that could be argued as critical components of the markets’ rise, such as the European fiscal issues, the housing rebound, and U.S. fiscal policy developments.

But, setting emotion and headlines aside and measuring statistically, there are three things that have really mattered to the markets: the Federal Reserve’s (Fed) stimulus, the outlook for earnings, and the labor market. The movements in these three have been aligned on a week-to-week basis with stock market value about 90% of the time during this bull market.

Specifically, there has been a 90% correlation on a weekly basis since the bull market began on March 6, 2009 between the value of the U.S. stock market, measured by the market capitalization of all U.S. stocks according to Bloomberg data, and each of the following: the size of the assets on the Fed’s balance sheet, initial filings for unemployment benefits, and the Wall Street analysts’ consensus estimate for next 12 months’ earnings per share for the S&P 500. These have explained the short-term and long-term movements very well.

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