1. Has Quantitative Easing and Operation Twist affected the P/E valuation of the S&P 500?
2. If so, what would be a way to take (QE & OT) away to make the S&P 500 P/E on a true relative basis from previous years?
3. It's the general assumption that the QEs have driven the stock market higher, and still is only 17.96 PE Ratio (http://www.multpl.com/) , would taking away the affects of the Fed make equities actually cheaper than 17.96?
I would appreciate anyone's logic behind their reasoning.
1) Yes - look up "search for yield" on google and you'll get tons of articles. Basically the Fed buys up all fixed income products and pushes us to invest in equities more than we'd normally want to.
2) There really isn't a way - The only other developed country that went through a serious QE program was Japan in 2001. We're basically playing with an untested economic theory.
Any answer would be an extremely complicated to say the least - without good data any statistical model has limited usefulness
3) Yes - If the fed never provided more liquidity to the markets in 2008 we would be much worse off. Problem is the fed has been building a huge balance sheet and most people don't really question when the Fed is going to stop - that basically forces to Fed to continue.
They probably should've given a strict deadline for when to dump assets because its ruining the true signal that stock prices gave. Plus the yield curve, one of the most important indicators, is so flat it's a useless tool now.
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