Key Points

  • If the stock market gains of the past 10 years are largely attributable to central bank purchases, then the return of growth to central bank balance sheets that began this month would be a strong positive signal for stock market investors.

  • Yet, analysis reveals no consistent relationship between growth in central bank balance sheets and growth in the stock market on a rolling 12 month basis.

  • As we head into 2020, investors should be cautious in assuming that the return of central bank balance sheet growth means stocks will follow along.

There seems to be a widely held view that Quantitative Easing (QE), more specifically central bank bond purchases, lifts the stock market. Some expand this view further believing the stock market gains of the past 10 years are largely attributable to central bank purchases, supported by the fact that central bank balance sheets and the stock market have both generally been on the rise since the financial crisis, as you can see in the chart below.

On the rise: central bank assets and stocks

Fed=Federal Reserve, ECB=European Central Bank, BOJ=Bank of Japan

Source: Charles Schwab, Bloomberg data as of 11/22/2019. Past performance is no guarantee of future results.

This would suggest that when central banks are buying investors should expect gains, and when they are not stocks may struggle. If true, the return of growth to central bank balance sheets that began this month would be a strong positive signal for stock market investors.