The S&P 500 is going to rise to 3,200 within the next two years… at least, that’s a possible outcome according to Laszlo Birinyi, Founder of Birinyi Associates.
I can only assume that institutional investors pay this permabull for his opinion because they like hearing that stocks will go up. After all, if Birinyi’s prediction comes true, institutional investors’ assets under management would swell – along with their fee income.
Never mind the fact that Birinyi’s January 2011 forecast, in which he predicted the S&P 500 would surpass 2,800 by September 2013, was proven false. We’re still not even there.
Back in reality, we can assess the likelihood of strong stock market returns by examining the S&P 500’s post-crisis returns. What we find is that returns are much higher when the Federal Reserve has been conducting one of its three quantitative easing (QE) stimulus programs.
The chart below plots S&P 500 returns with and without QE:
The annualized return for the S&P 500 under a performance-enhancing QE regimen is 19.2%. Yet, like the home run records from Major League Baseball’s steroid era, these returns deserve an asterisk. Without regular QE injections, the S&P 500’s post-crisis annualized return of 4.6% shows noticeable atrophy.
In fact, without QE, returns are lower and volatility is higher. The annualized standard deviation of returns under QE1, QE2, or QE3 is 18.1% versus 19.1% absent QE. This makes sense because QE also artificially suppresses volatility. It’s like taking an estrogen inhibitor from BALCO.
I’ve seen several versions of this chart, but it’s really a shame that it’s not more popular. Alas, few are willing to admit that stock market returns have been juiced by Fed stimulus.
The Fed’s QE3 ended in October 2014, but I’m sure Birinyi and his ilk would love to see more stimulus. And if the Fed implements QE4, we might get to his target. However, if the efficacy of QE is diminished this time around, then we should worry. Like a bodybuilder who turns to horse steroids, Fed Chair Janet Yellen will have no choice but to increase the stimulus dosages to keep seeing unnatural growth.
Safe (and high-yield) investing,
Alan Gula, CFA