Practical analysis for investment professionals
13 October 2016

Bearish on a Bull Market: Central Banks and the S&P 500

Equity markets are at or near all-time highs in the United States.

The S&P 500 stood at roughly 2140 as of 12 October 2016, not far off from its 6 September peak of 2186.48. The Dow Jones Industrial Average (DJIA) and the NASDAQ composite are at or around their highs as well.

This would qualify as good news if we lived in normal circumstances. But it doesn’t and we don’t.

There is an underlying sense that US equity markets are artificially inflated, that their current values do not reflect reality.

Why is that? Looking around the country, there are positive signs. Wages are risingNew jobless claims are at 40-year lows. Growth hasn’t been robust, but it’s held at roughly 2% over the last five years, better than in many other developed economies.

Yet skepticism abounds. And for good reason. Earnings have declined for five consecutive quarters, yet still the S&P 500 and the other indices continue to rise.

So what’s propelling the surge?

To find out, we asked readers of CFA Institute Financial NewsBrief for their perspective on what was behind the gains in the S&P 500. An overwhelming consensus emerged.


What best explains the S&P 500 reaching record levels?

What best explains the S&P 500 reaching record levels?

* Results do not add up to 100% due to rounding.


Of the 1062 respondents, 59% identified low interest rates and monetary policy as the driving force behind the index’s rise. The US Federal Reserve, with vital assists from its counterparts in Japan, the European Union (EU), and elsewhere, is propping the index up through low, nonexistent, or negative interest rates, and through the residual effects of quantitative easing (QE) on the part of the Fed, and the ongoing QE measures of the Bank of Japan (BOJ), European Central Bank (ECB), etc.

The index is being pumped up by easy money.

Another 15% of respondents said that the S&P 500’s performance indicates a bubble is building, while 3% could only scratch their heads, declaring that the index’s rise is an explanation-defying mystery.

There are no doubt a number of lessons to be drawn from these results. But it is striking how few participants believe the index reflects real value. Only 6% say actual economic growth is behind the surge, and just 2% cite underlying company fundamentals.

There is also a strain of ambivalence. A 16% cohort credited the relative appeal of US equities, suggesting that investors are pouring money into US stocks not necessarily because they believe they are a good investment but because they are the best amid a series of bad options.

Only about 8% of respondents think the S&P 500 is properly valued.

All of this suggests a reckoning may be coming.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Paul McCaffrey

Paul McCaffrey is the editor of Enterprising Investor at CFA Institute. Previously, he served as an editor at the H.W. Wilson Company. His writing has appeared in Financial Planning and DailyFinance, among other publications. He holds a BA in English from Vassar College and an MA in journalism from the City University of New York (CUNY) Graduate School of Journalism.

1 thought on “Bearish on a Bull Market: Central Banks and the S&P 500”

  1. Peter says:

    There is a fallacy in this user survey. That 59% of readers believe monetary policy is the cause does not mean they are right. If you read the article by Professor Damadorna’s blog Musings on market post from last year, he makes a compelling case that in fact low rates/monetary policy only accounts for up to 10% of the stock valuations and that the other 90% are mostly company-specific related pure valuation metrics. It would be interested to see if the ‘wisdom of crowds’ is right or wrong on this issue.

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