- Concerted balance-sheet expansion by central banks around the world is the root cause of stock-market gains during the 8-1/2-year bull market, says Cantor Fitzgerald’s Peter Cecchini.
- That global quantitative easing has been crucial in supporting earnings growth and helping economic expansion worldwide.
- Now that the Federal Reserve is planning to unwind its massive balance sheet, investors are worried about what happens next.
My investigation has led me to consider earnings growth, which some say is the undisputed driver of share gains. Then there’s surprisingly strong economic expansion, which some see as underpinning the move higher.
And if President Donald Trump is to be believed, he is responsible for the 8-1/2-year bull market’s new highs — something I found to be true only in the months right after the election in November.
After my latest story on the subject earlier this month, things took a crucial turn when Peter Cecchini, the chief market strategist and head of equity derivatives at Cantor Fitzgerald, sent me a message. He told me that while I was on the right track, I needed to get back to basics and recognise the root cause of the drivers outlined above.
“The mother of all causes is global central-bank balance-sheet accommodation and how aggressive they have been,” Cecchini said on a follow-up phone call. “I don’t think it’s possible to deny the power of global rates.”
To gain an appreciation for the sheer amount of money central banks have pumped into the global economy, look at the chart below. The red line shows the Federal Reserve’s balance sheet, while the blue one shows the aggregate sum of those of the Fed, the European Central Bank, the People’s Bank of China, and the Bank of Japan.
And as you can see, the expansion has been an astronomical $US13 trillion of capital pumped into markets around the world since the start of 2008. The US alone has seen its balance sheet grow by almost $US4 trillion over the period, while the market value of US equities has expanded by $US12 trillion since the financial crisis.
The way Cecchini looks at it, everything stems from this unprecedented stimulus, while the other factors I was looking at — namely earnings growth — are symptoms of it.
Near-zero interest rates have made massive stockpiles of money available to companies at a very low cost, and they have used much of it for share repurchases. While these companies have been able to issue cheap debt, they have had a veritable war chest of capital to use to buy back their stock — a tactic that causes immediate share-price appreciation and helps the broader stock market through lean times.
Easy lending conditions have also allowed companies to use heaps of money on other endeavours, like mergers-and-acquisitions activity or internal capital expenditures. Goldman Sachs says the latter practice — which involves investing money back into core businesses — is getting more important and that stock traders are increasingly rewarding corporations for doing it.
But perhaps the most incredible facet of mass balance-sheet expansion is that it’s taking place this far along in the economic cycle, Cecchini says. He and his colleagues at Cantor Fitzgerald calculate that overall global central-bank stimulus is roughly 10% of the size of the S&P 500 — a historically unprecedented level.
And with that, Cecchini inspired an epiphany in me. The answer to the burning question of what’s driving stock-market records had been staring me in the face all along — I just hadn’t realised it.
Still, the hints were out there. Earlier this month, Business Insider asked a series of investors about their biggest market fears, and they all said it was the unwinding of the Fed’s balance sheet.
Of course. It makes perfect sense that the biggest looming worry for the market is the reversal of what got us here in the first place.
Now my attention will shift to how investors will react to the scaling back of this unprecedented stimulus. Will the more-symptomatic factors outlined above keep the market afloat?
It looks like that’s the next big question I’ll have to tackle.