Picture du Jour: Turning off the “juice”

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Further to my post of yesterday about how US equities will react when the Federal Reserve decides to tighten monetary policy by hiking the Fed fund rate, Morgan Stanley (via Clusterstock – Chart of the Day) provided an interesting chart.

As shown below, the S&P 500 Index has historically been highly correlated with “excess credit” growth (i.e. the change in non-financial credit). Stating the obvious, the March 2009 rally was propelled by an avalanche of easy money.

Although tighter money does not necessarily spell a declining stock market, turning off the “juice” will certainly remove a tailwind, making earnings growth the key determinant for generating further gains (especially in the light of stretched valuations).

clusterstock0203

Source: Clusterstock – Chart of the Day, March 1, 2010.

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More on this topic (What's this?)
Rising Interst Rates Historically A Positive For Equity Returns
Anticipating The Rate Hike
You can't really see it on this chart so you'll have to trust me
Read more on Federal Reserve at Wikinvest
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