Here's Why Markets Are Nervous About a Fed Pullback
NEW YORK (The Street) --- Here's why many investors have been nervous about the pending pullback of the Federal Reserve's stimulus program: check out the correlation between the Fed's balance sheet and the Standard & Poor's 500 Index
There's no doubt bond-buying has boosted the relative appeal of equities, underpinning the rebound in markets. But the rally -- the S&P 500 has gained 25% this year, poised for its best year since 2003 -- has also been justified in part by earnings growth.
Before the crisis there was little apparent correlation between the Fed's balance sheet and the S&P 500 (see below)
That's a scenario the central bank will be hoping it can restore without too much disruption to confidence.
For now, the signs are good. Markets were higher on Monday amid a spate of positive economic data, suggesting the central bank has priced in a pullback in bond purchases. The Fed kicks off its meeting tomorrow and announces its policy decision on Wednesday.
-- By Jane Searle in New York
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