Macroeconomics by Davide Buccheri

For years we’ve now lived in an environment of falling rates. Both in the US and Europe, central banks have repeatedly slashed interest rates in an effort to kick start the economy. However, these policies also have an effect on valuations: a shrinking discount rate inflates the value of securities. In a previous analysis , I showed how the S&P 500 is currently at a level significantly higher than what the GDP growth rate suggests is reasonable. Here, I try to provide a possible explanation for this deviation, by estimating the effect that these expansionary policies might have had on the valuation of the index. Due to the nature of the topic, a lot of assumptions will be needed, such as the use of a pricing model. Nonetheless, the findings are remarkably in line with what economic fundamentals suggest and quite intriguing. Trend in yields The chart below was obtained using data from FRED St.Louis and shows the trend in the yield of the 10-year constant-maturity Treasury Bond ...

GDP is a widely used indicator of a country’s wealth. Logically, one would expect this metric to be linked in some way to the value of stocks. After all, in the long run, the growth rate of the two should be identical. If businesses were to grow faster than GDP, they'd eventually represent virtually the entire economy, at which point the two would be one and the same. If the opposite were true, businesses would shrink until they became nonexistent. But what does the data say? The results are, actually, quite interesting. U.S. GDP and S&P 500 Comparing the quarterly values for the S&P 500 to the nominal US GDP from 1950 to today reveals a quite strong relationship between the two. This is not something unexpected. What is surprising, however, is the effect that financial crises seem to have on the relationship between the two. Looking at the chart above, GDP almost seem to function as a moving average (or support even) for the market. In the long run, the tw...