"We find it ironic that in December 1996, when Mr. Greenspan suggested that perhaps there was some ‘irrational exuberance’ elevating asset prices in the United States, the dividend yield on the S&P 500 was 2 percent," said Doug Cliggott, head of U.S. equity strategy for Credit Suisse, in a note. "Here we are 14 years later, and it appears the Federal Reserve is on the cusp of large scale asset purchases with the clear goal of inflating asset prices. And the yield on the S&P 500 today is again 2 percent. Perhaps we are entering a new age of ‘artificial exuberance’.
Cliggott, who made a name for himself by calling the top of the tech bubble when he was employed by JPMorgan, is pointing out quite an interesting role reversal at a time when stocks relative to dividend payouts are valued at virtually the same levels. While the strategist certainly has his doubts about whether large scale assets purchases by the nation’s central bank will work, it’s not stopping him from calculating how much buying power Ben Bernanke’s incremental purchases could have.
By his calculation, every $100 billion yield-lowering Treasury purchase will add nine points onto the S&P 500. Cliggott gets to that figure by using a proprietary valuation method that indicates $100 billion in government bond purchases will lower the risk-free yield by three basis points, or .03 percent. That in turn translates into a three index point gain in the S&P 500. If the purchases total as much as $1 trillion, as Cliggott believes possible, that means a 90-point, or 8 percent, rise in the S&P 500.
The Federal Open Market Committee is expected to unveil its plan for these purchases at the end of their next meeting on November 3rd. But don’t get all exuberant yourself yet.
Stocks turned lower yesterday after Fed Bank of St. Louis President James Bullard said that the stimulus may be rolled out in "small increments" as needed, deflating the hopes of those wanting that $1 trillion reflation Kaboom.
A CNBC survey of economists, fund managers and traders this month showed that they believe, on average, the Fed will announce plans to purchase $500 billion worth of assets. Respondents also gave estimates as low as $100 billion and as high as $1.5 trillion. By Credit Suisse’s math, a $500 billion purchase would add just 45 points, or less than 4 percent, to the S&P 500.
To be sure, anticipation of this move may already be baked into the market during the rally since the summer. For this reason, in the end, Cliggott believes the S&P 500 will get to just 1200 at the end of ‘QE2’ in 2011 anyway.
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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team