This document discusses the impact of loose global monetary policy on economic growth and equity markets since the 2008 financial crisis. Central banks around the world expanded their balance sheets significantly through measures like quantitative easing to stimulate their economies. This monetary expansion appears highly correlated with rising asset prices and market performance. However, as interest rates are expected to rise, the effects of tightening monetary policy on market volatility and asset price appreciation require careful portfolio positioning.

1. Market Perspective – November 2016
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Overview: Since the end of the 2008-2009 financial crisis, investors have debated the effect of
loose global monetary policy on economic growth and the equity markets. Monetary policy has
been an undeniable factor in driving growth and inflating asset prices. With interest rates
expected to rise, we examine the impact of central bank policy in this month’s perspective.

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Global Central Bank Balance Sheet Expansion
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• To ensure liquidity, stimulate global
economies, and promote economic
recovery/growth after the Great
Recession, global central banks
utilized emergency monetary
policies.
• For example, the U.S. Federal
Reserve Bank reduced the federal
fund rate from 4.0% in 2007 to
0.5% today, in addition to multiple
rounds of Quantitative Easing (QE).
• Likewise, central banks around the
globe pumped liquidity into the
system. As a result, the total assets
held by major central banks
increased almost three-fold above
pre-financial crisis levels.
Source: Yardini Research

3. Effects – Federal Reserve Balance Sheet vs. S&P 500
• This chart shows the growth of
the Federal Reserve balance
sheet (in blue) over the past 5
years vs. the S&P 500
performance (in yellow) on a
normalized basis.
• While it is difficult to examine
the exact percentage of
economic growth (and
accordingly market performance
due to the growth of the Federal
Reserve balance sheet), the
correlation appears to be high.
• In fact, since the U.S. Fed
balance sheet stabilized/stopped
growing in late 2014, domestic
market performance has
exhibited more volatility, and
has been relatively flat.
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4. Effects – S&P 500 Earnings vs. P/E Multiple
• While the S&P 500 has been relatively
stagnant for 2 years, a deeper look
suggests monetary policy may be
keeping multiples high, due to a low
interest rate environment and a low
implied discount rate.
• Since 2015, much of the S&P 500
performance can be attributed to P/E
multiple expansion (green line) rather
than corporate earnings growth (red
line).
• By keeping interest rates low, the Fed
intends to boost spending, while
increasing borrowing and
consumer/corporate investment. The
decline in S&P 500 corporate profits
presents challenges going forward.
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5. Effects – BOJ Balance Sheet & Yen vs. Nikkei
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• This chart shows the growth of
Bank of Japan’s (BOJ) balance
sheet (in yellow) over the past 5
years vs. the Topix and Yen
performance (in white and pink
respectively) on a normalized
basis.
• The effect of the BOJ’s monetary
stimulus on the Yen, and
consequently on the Japanese
stock market, appears to have a
strong correlation.
• Despite further bloating of the
BOJ’s balance sheet and its
recent announcement to
“conduct purchases at more or
less the current pace,” the Yen
has strengthened and the Topix
has been weak year to date.

6. Effects – ECB Balance Sheet and Fed Balance Sheet vs. MSCI Europe
• This chart shows the growth
of the European Central
Bank’s (ECB) balance sheet (in
blue) over the past 5 years vs.
the MSCI Europe Equity
performance (in yellow) on a
normalized basis. As you can
see, there is less of a direct
relationship. The ECB
tightened policy in 2013
before loosening policy again
in mid-to-late 2014.
• However, we again overlay the
U.S. Federal Reserve balance
sheet (in green). It seems that
U.S. monetary policy has
driven European equity prices
(and most other global equity
prices) as well, in part due to
currency fluctuations.
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7. Market Perspective – November 2016
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Conclusion: Global central bank balance sheets have expanded rapidly since the financial crisis.
This appears to have driven asset prices higher. Furthermore, loose monetary policies likely
exacerbated global indebtedness via low interest rates and QE. As Fed policy shifts towards
tightening, markets will react and could become more volatile. Thoughtful portfolio positioning
remains essential, given that monetary policy may be moderating and asset prices may not
appreciate at the same pace in a tighter economic environment.

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Disclaimer
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Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.