I was discussing how much the Fed has distorted the stock market earlier today with my friend and canoe buddy, Scott Frew, who runs the Rockingham Capital hedge fund.
He sent over these charts that look at the relationship between GDP growth and stock appreciation in the 5 Quarters that follow the official NBER declaration of the end of the prior recession.
Note that this go round, the stock gains relative to GDP growth are rather outsized — up 24% for a mere 4% GDP. What is even more astonishing is this follows an already substantial 60% gain — SPX 666 to 919 — prior to the recession being declared over.
Looking at long term measures of valuation, such as Tobin Q ratio or Shiller’s Cyclically Adjusted Price/Earnings ratio, the market is significantly over valued. The likely cause is the Fed.
The caveats are that markets can remain over valued for extensive periods of time, and the Fed can keep the spigots open indefinitely.
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2009-10
1949-51
1954-55
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7 additional recession recoveries after the jump
1958-59
1961-62
1970-72
1980-81
1982-84
1991-92
2001-03
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